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Nego

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,


vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.

REGALADO, J.:

This petition for review on certiorari impugns and seeks the reversal of the
decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1
affirming with modifications, the earlier decision of the Regional Trial Court of
Manila, Branch XLII, 2 which dismissed the complaint filed therein by herein
petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and adopted by
respondent court, appears of record:

1. On various dates, defendant, a commercial banking institution, through its


Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel
dela Cruz who deposited with herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of
Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280);

CTD CTD
Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000


26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein
plaintiff in connection with his purchased of fuel products from the latter
(Original Record, p. 208).

3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the
Sucat Branch Manger, that he lost all the certificates of time deposit in dispute.
Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of
Loss, as required by defendant bank's procedure, if he desired replacement of said
lost CTDs (TSN, February 9, 1987, pp. 48-50).

4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank
the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said
affidavit of loss, 280 replacement CTDs were issued in favor of said depositor
(Defendant's Exhibits 282-561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from
defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos
(P875,000.00). On the same date, said depositor executed a notarized Deed of
Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de la
Cruz) surrenders to defendant bank "full control of the indicated time deposits
from and after date" of the assignment and further authorizes said bank to pre-
terminate, set-off and "apply the said time deposits to the payment of whatever
amount or amounts may be due" on the loan upon its maturity (TSN, February 9, 1987,
pp. 60-62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex


(Phils.) Inc., went to the defendant bank's Sucat branch and presented for
verification the CTDs declared lost by Angel dela Cruz alleging that the same were
delivered to herein plaintiff "as security for purchases made with Caltex
Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563)


from herein plaintiff formally informing it of its possession of the CTDs in
question and of its decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish


the former "a copy of the document evidencing the guarantee agreement with Mr.
Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against
which plaintiff proposed to apply the time deposits (Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiff's demand and claim for
payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant's
Exhibit 566).

11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured
and fell due and on August 5, 1983, the latter set-off and applied the time
deposits in question to the payment of the matured loan (TSN, February 9, 1987, pp.
130-131).

12. In view of the foregoing, plaintiff filed the instant complaint, praying that
defendant bank be ordered to pay it the aggregate value of the certificates of time
deposit of P1,120,000.00 plus accrued interest and compounded interest therein at
16% per annum, moral and exemplary damages as well as attorney's fees.

After trial, the court a quo rendered its decision dismissing the instant
complaint. 3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal
of the complaint, hence this petition wherein petitioner faults respondent court in
ruling (1) that the subject certificates of deposit are non-negotiable despite
being clearly negotiable instruments; (2) that petitioner did not become a holder
in due course of the said certificates of deposit; and (3) in disregarding the
pertinent provisions of the Code of Commerce relating to lost instruments payable
to bearer. 4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a


better understanding of the issues involved in this recourse.

SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS:
FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine
Currency, repayable to said depositor 731 days. after date, upon presentation and
surrender of this certificate, with interest at the rate of 16% per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments,
nationalizing as follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs
issued, it is important to note that after the word "BEARER" stamped on the space
provided supposedly for the name of the depositor, the words "has deposited" a
certain amount follows. The document further provides that the amount deposited
shall be "repayable to said depositor" on the period indicated. Therefore, the text
of the instrument(s) themselves manifest with clarity that they are payable, not to
whoever purports to be the "bearer" but only to the specified person indicated
therein, the depositor. In effect, the appellee bank acknowledges its depositor
Angel dela Cruz as the person who made the deposit and further engages itself to
pay said depositor the amount indicated thereon at the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in
question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the
Negotiable Instruments Law, enumerates the requisites for an instrument to become
negotiable, viz:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and


(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.

The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties' bone of contention is with regard to requisite (d) set
forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch
Manager way back in 1982, testified in open court that the depositor reffered to in
the CTDs is no other than Mr. Angel de la Cruz.

x x x x x x x x x

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the bank, the
depositor referred (sic) in these certificates states that it was Angel dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel dela Cruz was the
one who cause (sic) the amount.

Atty. Calida:

q And no other person or entity or company, Mr. Witness?

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these certificates of


time deposit insofar as the bank is concerned?

witness:

a Angel dela Cruz is the depositor. 8

x x x x x x x x x

On this score, the accepted rule is that the negotiability or non-negotiability of


an instrument is determined from the writing, that is, from the face of the
instrument itself.9 In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained. 10 While the writing may
be read in the light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as they have constituted the
writing to be the only outward and visible expression of their meaning, no other
words are to be added to it or substituted in its stead. The duty of the court in
such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the
words they have used. What the parties meant must be determined by what they said.
11

Contrary to what respondent court held, the CTDs are negotiable instruments. The
documents provide that the amounts deposited shall be repayable to the depositor.
And who, according to the document, is the depositor? It is the "bearer." The
documents do not say that the depositor is Angel de la Cruz and that the amounts
deposited are repayable specifically to him. Rather, the amounts are to be
repayable to the bearer of the documents or, for that matter, whosoever may be the
bearer at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la
Cruz only, it could have with facility so expressed that fact in clear and
categorical terms in the documents, instead of having the word "BEARER" stamped on
the space provided for the name of the depositor in each CTD. On the wordings of
the documents, therefore, the amounts deposited are repayable to whoever may be the
bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de
la Cruz is the depositor "insofar as the bank is concerned," but obviously other
parties not privy to the transaction between them would not be in a position to
know that the depositor is not the bearer stated in the CTDs. Hence, the situation
would require any party dealing with the CTDs to go behind the plain import of what
is written thereon to unravel the agreement of the parties thereto through facts
aliunde. This need for resort to extrinsic evidence is what is sought to be avoided
by the Negotiable Instruments Law and calls for the application of the elementary
rule that the interpretation of obscure words or stipulations in a contract shall
not favor the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time,
the answer is in the negative. The records reveal that Angel de la Cruz, whom
petitioner chose not to implead in this suit for reasons of its own, delivered the
CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank
thereof at any time. Unfortunately for petitioner, although the CTDs are bearer
instruments, a valid negotiation thereof for the true purpose and agreement between
it and De la Cruz, as ultimately ascertained, requires both delivery and
indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in
reality delivered to it as a security for De la Cruz' purchases of its fuel
products. Any doubt as to whether the CTDs were delivered as payment for the fuel
products or as a security has been dissipated and resolved in favor of the latter
by petitioner's own authorized and responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q.
Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit
were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel
products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its
protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon. 14 A party may not go
back on his own acts and representations to the prejudice of the other party who
relied upon them. 15 In the law of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led another to
believe a particular thing true, and to act upon such belief, he cannot, in any
litigation arising out of such declaration, act, or omission, be permitted to
falsify it. 16

If it were true that the CTDs were delivered as payment and not as security,
petitioner's credit manager could have easily said so, instead of using the words
"to guarantee" in the letter aforequoted. Besides, when respondent bank, as
defendant in the court below, moved for a bill of particularity therein 17 praying,
among others, that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a
receipt showing that the CTDs were delivered to it by De la Cruz as payment of the
latter's alleged indebtedness to it, plaintiff corporation opposed the motion. 18
Had it produced the receipt prayed for, it could have proved, if such truly was the
fact, that the CTDs were delivered as payment and not as security. Having opposed
the motion, petitioner now labors under the presumption that evidence willfully
suppressed would be adverse if produced. 19

Under the foregoing circumstances, this disquisition in Intergrated Realty


Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:

. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote


therefrom:

The character of the transaction between the parties is to be determined by their


intention, regardless of what language was used or what the form of the transfer
was. If it was intended to secure the payment of money, it must be construed as a
pledge; but if there was some other intention, it is not a pledge. However, even
though a transfer, if regarded by itself, appears to have been absolute, its object
and character might still be qualified and explained by contemporaneous writing
declaring it to have been a deposit of the property as collateral security. It has
been said that a transfer of property by the debtor to a creditor, even if
sufficient on its face to make an absolute conveyance, should be treated as a
pledge if the debt continues in inexistence and is not discharged by the transfer,
and that accordingly the use of the terms ordinarily importing conveyance of
absolute ownership will not be given that effect in such a transaction if they are
also commonly used in pledges and mortgages and therefore do not unqualifiedly
indicate a transfer of absolute ownership, in the absence of clear and unambiguous
language or other circumstances excluding an intent to pledge.

Petitioner's insistence that the CTDs were negotiated to it begs the question.
Under the Negotiable Instruments Law, an instrument is negotiated when it is
transferred from one person to another in such a manner as to constitute the
transferee the holder thereof, 21 and a holder may be the payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof. 22 In the present
case, however, there was no negotiation in the sense of a transfer of the legal
title to the CTDs in favor of petitioner in which situation, for obvious reasons,
mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof
only as security for the purchases of Angel de la Cruz (and we even disregard the
fact that the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a
negotiation for such purpose cannot be effected by mere delivery of the instrument
since, necessarily, the terms thereof and the subsequent disposition of such
security, in the event of non-payment of the principal obligation, must be
contractually provided for.

The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the extent of
his lien. 23 As such holder of collateral security, he would be a pledgee but the
requirements therefor and the effects thereof, not being provided for by the
Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also


be pledged. The instrument proving the right pledged shall be delivered to the
creditor, and if negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description
of the thing pledged and the date of the pledge do not appear in a public
instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual
findings of respondent court quoted at the start of this opinion show that
petitioner failed to produce any document evidencing any contract of pledge or
guarantee agreement between it and Angel de la Cruz. 25 Consequently, the mere
delivery of the CTDs did not legally vest in petitioner any right effective against
and binding upon respondent bank. The requirement under Article 2096 aforementioned
is not a mere rule of adjective law prescribing the mode whereby proof may be made
of the date of a pledge contract, but a rule of substantive law prescribing a
condition without which the execution of a pledge contract cannot affect third
persons adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of
respondent bank was embodied in a public instrument. 27 With regard to this other
mode of transfer, the Civil Code specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as


against third persons, unless it appears in a public instrument, or the instrument
is recorded in the Registry of Property in case the assignment involves real
property.

Respondent bank duly complied with this statutory requirement. Contrarily,


petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither
proved the amount of its credit or the extent of its lien nor the execution of any
public instrument which could affect or bind private respondent. Necessarily,
therefore, as between petitioner and respondent bank, the latter has definitely the
better right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question
of whether or not private respondent observed the requirements of the law in the
case of lost negotiable instruments and the issuance of replacement certificates
therefor, on the ground that petitioner failed to raised that issue in the lower
court. 28

On this matter, we uphold respondent court's finding that the aspect of alleged
negligence of private respondent was not included in the stipulation of the parties
and in the statement of issues submitted by them to the trial court. 29 The issues
agreed upon by them for resolution in this case are:

1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDs
against the depositor's loan by virtue of the assignment (Annex "C").

3. Whether or not there was legal compensation or set off involving the amount
covered by the CTDs and the depositor's outstanding account with defendant, if any.

4. Whether or not plaintiff could compel defendant to preterminate the CTDs


before the maturity date provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's fees and
litigation expenses from each other.

As respondent court correctly observed, with appropriate citation of some doctrinal


authorities, the foregoing enumeration does not include the issue of negligence on
the part of respondent bank. An issue raised for the first time on appeal and not
raised timely in the proceedings in the lower court is barred by estoppel. 30
Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first
time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all issues of
law and fact which they intend to raise at the trial, except such as may involve
privileged or impeaching matters. The determination of issues at a pre-trial
conference bars the consideration of other questions on appeal. 32

To accept petitioner's suggestion that respondent bank's supposed negligence may be


considered encompassed by the issues on its right to preterminate and receive the
proceeds of the CTDs would be tantamount to saying that petitioner could raise on
appeal any issue. We agree with private respondent that the broad ultimate issue of
petitioner's entitlement to the proceeds of the questioned certificates can be
premised on a multitude of other legal reasons and causes of action, of which
respondent bank's supposed negligence is only one. Hence, petitioner's submission,
if accepted, would render a pre-trial delimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court
below, petitioner still cannot have the odds in its favor. A close scrutiny of the
provisions of the Code of Commerce laying down the rules to be followed in case of
lost instruments payable to bearer, which it invokes, will reveal that said
provisions, even assuming their applicability to the CTDs in the case at bar, are
merely permissive and not mandatory. The very first article cited by petitioner
speaks for itself.

Art 548. The dispossessed owner, no matter for what cause it may be, may apply
to the judge or court of competent jurisdiction, asking that the principal,
interest or dividends due or about to become due, be not paid a third person, as
well as in order to prevent the ownership of the instrument that a duplicate be
issued him. (Emphasis ours.)

x x x x x x x x x

The use of the word "may" in said provision shows that it is not mandatory but
discretionary on the part of the "dispossessed owner" to apply to the judge or
court of competent jurisdiction for the issuance of a duplicate of the lost
instrument. Where the provision reads "may," this word shows that it is not
mandatory but discretional. 34 The word "may" is usually permissive, not mandatory.
35 It is an auxiliary verb indicating liberty, opportunity, permission and
possibility. 36

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of


the Code of Commerce, on which petitioner seeks to anchor respondent bank's
supposed negligence, merely established, on the one hand, a right of recourse in
favor of a dispossessed owner or holder of a bearer instrument so that he may
obtain a duplicate of the same, and, on the other, an option in favor of the party
liable thereon who, for some valid ground, may elect to refuse to issue a
replacement of the instrument. Significantly, none of the provisions cited by
petitioner categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined therein, and
none establishes a mandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and the
appealed decision is hereby AFFIRMED.

SO ORDERED.

Narvasa, C.J., Padilla and Nocon, JJ., concur.


Footnotes

1 Per Justice Segundino G. Chua, with the concurrence of Justices Santiago M.


Kapunan and Luis L. Victor.

2 Judge Ramon Mabutas, Jr., presiding; Rollo, 64-88.

3 Rollo, 24-26.

4 Ibid., 12.

5 Exhibit A, Documentary Evidence for the Plaintiff, 8.

6 Rollo, 28.

7 TSN, February 9, 1987, 46-47.

8 Ibid., id., 152-153.

9 11 Am. Jur. 2d, Bills and Notes, 79.

10 Ibid., 86.

11 Ibid., 87-88.

12 Art. 1377, Civil Code.

13 Exhibit 563, Documentary Evidence for the Defendant, 442; Original Record, 211.

14 Panay Electric Co., Inc. vs. Court of Appeals, et al., 174 SCRA 500 (1989).

15 Philippine National Bank vs. Intermediate Appellate Court, et al., 189 SCRA 680
(1990).

16 Section 2(a), Rule 131, Rules of Court.

17 Original Record, 152.

18 Ibid., 154.

19 Section 3(e), Rule 131, Rules of Court.

20 174 SCRA 295 (1989), jointly decided with Overseas Bank of Manila vs. Court of
Appeals, et al., G.R. No. 60907.

21 Sec. 30, Act No. 2031.

22 Sec. 191, id.

23 Sec. 27, id.; see also Art. 2118, Civil Code.

24 Commentaries and Jurisprudence on the Philippine Commercial Laws, T.C.


Martin, 1985 Rev. Ed., Vol. I, 134; Art. 18, Civil Code; Sec. 196, Act No. 2031.

25 Rollo, 25.

26 Tec Bi & Co. vs. Chartered Bank of India, Australia and China, 41 Phil. 596
(1916); Ocejo, Perez & Co. vs. The International Banking Corporation, 37 Phil. 631
(1918); Te Pate vs. Ingersoll, 43 Phil. 394 (1922).
27 Rollo, 25.

28 Ibid., 15.

29 Joint Partial Stipulation of Facts and Statement of Issues, dated November 27,
1984; Original Record, 209.

30 Mejorada vs. Municipal Council of Dipolog, 52 SCRA 451 (1973).

31 Sec. 18, Rule 46, Rules of Court; Garcia, et al. vs. Court of Appeals, et al.,
102 SCRA 597 (1981); Matienzo vs. Servidad, 107 SCRA 276 (1981); Aguinaldo
Industries Corporation, etc. vs. Commissioner of Internal Revenue, et al., 112 SCRA
136 (1982); Dulos Realty & Development Corporation vs. Court of Appeals, et al.,
157 SCRA 425 (1988).

32 Bergado vs. Court of Appeals, et al., 173 SCRA 497 (1989).

33 Rollo, 58.

34 U.S. vs. Sanchez, 13 Phil. 336 (1909); Capati vs. Ocampo, 113 SCRA 794 (1982).

35 Luna vs. Abaya, 86 Phil. 472 (1950).

36 Philippine Law Dictionary, F.B. Moreno, Third Edition, 590.

37 Rollo, 59.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 93397 March 3, 1997

TRADERS ROYAL BANK, petitioner,


vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL BANK of the
PHILIPPINES, respondents.

TORRES, JR., J.:

Assailed in this Petition for Review on Certiorari is the Decision of the


respondent Court of Appeals dated January 29, 1990,1 affirming the nullity of the
transfer of Central Bank Certificate of Indebtedness (CBCI) No. D891,2 with a face
value of P500,000.00, from the Philippine Underwriters Finance Corporation
(Philfinance) to the petitioner Trader's Royal Bank (TRB), under a Repurchase
Agreement3 dated February 4, 1981, and a Detached Assignment4 dated April 27, 1981.

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch
32, the action was originally filed as a Petition for Mandamus5 under Rule 65 of
the Rules of Court, to compel the Central Bank of the Philippines to register the
transfer of the subject CBCI to petitioner Traders Royal Bank (TRB).

In the said petition, TRB stated that:

3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters)


executed a "Detached Assignment" . . ., whereby Filriters, as registered owner,
sold, transferred, assigned and delivered unto Philippine Underwriters Finance
Corporation (Philfinance) all its rights and title to Central Bank Certificates of
Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000) and having an aggregate
value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);

4. The aforesaid Detached Assignment (Annex "A") contains an express


authorization executed by the transferor intended to complete the assignment
through the registration of the transfer in the name of PhilFinance, which
authorization is specifically phrased as follows: '(Filriters) hereby irrevocably
authorized the said issuer (Central Bank) to transfer the said bond/certificates on
the books of its fiscal agent;

5. On February 4, 1981, petitioner entered into a Repurchase Agreement with


PhilFinance . . ., whereby, for and in consideration of the sum of PESOS: FIVE
HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and delivered to
petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of
P500,000.00 . . ., which CBCI was among those previously acquired by PhilFinance
from Filriters as averred in paragraph 3 of the Petition;

6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance


agreed to repurchase CBCI Serial No. D891 (Annex "C"), at the stipulated price of
PESOS: FIVE HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100
(P519,361.11) on April 27, 1981;

7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity,


April 27, 1981, when the checks it issued in favor of petitioner were dishonored
for insufficient funds;

8. Owing to the default of PhilFinance, it executed a Detached Assignment in


favor of the Petitioner to enable the latter to have its title completed and
registered in the books of the respondent. And by means of said Detachment,
Philfinance transferred and assigned all, its rights and title in the said CBCI
(Annex "C") to petitioner and, furthermore, it did thereby "irrevocably authorize
the said issuer (respondent herein) to transfer the said bond/certificate on the
books of its fiscal agent." . . .

9. Petitioner presented the CBCI (Annex "C"), together with the two (2)
aforementioned Detached Assignments (Annexes "B" and "D"), to the Securities
Servicing Department of the respondent, and requested the latter to effect the
transfer of the CBCI on its books and to issue a new certificate in the name of
petitioner as absolute owner thereof;

10. Respondent failed and refused to register the transfer as requested, and
continues to do so notwithstanding petitioner's valid and just title over the same
and despite repeated demands in writing, the latest of which is hereto attached as
Annex "E" and made an integral part hereof;
11. The express provisions governing the transfer of the CBCI were substantially
complied with the petitioner's request for registration, to wit:

"No transfer thereof shall be valid unless made at said office (where the
Certificate has been registered) by the registered owner hereof, in person or by
his attorney duly authorized in writing, and similarly noted hereon, and upon
payment of a nominal transfer fee which may be required, a new Certificate shall be
issued to the transferee of the registered holder thereof."

and, without a doubt, the Detached Assignments presented to respondent were


sufficient authorizations in writing executed by the registered owner, Filriters,
and its transferee, PhilFinance, as required by the above-quoted provision;

12. Upon such compliance with the aforesaid requirements, the ministerial duties
of registering a transfer of ownership over the CBCI and issuing a new certificate
to the transferee devolves upon the respondent;

Upon these assertions, TRB prayed for the registration by the Central Bank of the
subject CBCI in its name.

On December 4, 1984, the Regional Trial Court the case took cognizance of the
defendant Central Bank of the Philippines' Motion for Admission of Amended Answer
with Counter Claim for Interpleader6 thereby calling to fore the respondent
Filriters Guaranty Assurance Corporation (Filriters), the registered owner of the
subject CBCI as respondent.

For its part, Filriters interjected as Special Defenses the following:

11. Respondent is the registered owner of CBCI No. 891;

12. The CBCI constitutes part of the reserve investment against liabilities
required of respondent as an insurance company under the Insurance Code;

13. Without any consideration or benefit whatsoever to Filriters, in violation of


law and the trust fund doctrine and to the prejudice of policyholders and to all
who have present or future claim against policies issued by Filriters, Alfredo
Banaria, then Senior Vice-President-Treasury of Filriters, without any board
resolution, knowledge or consent of the board of directors of Filriters, and
without any clearance or authorization from the Insurance Commissioner, executed a
detached assignment purportedly assigning CBCI No. 891 to Philfinance;

xxx xxx xxx

14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar


Jacobe, Vice-President-Treasury of Filriters (both of whom were holding the same
positions in Philfinance), without any consideration or benefit redounding to
Filriters and to the grave prejudice of Filriters, its policy holders and all who
have present or future claims against its policies, executed similar detached
assignment forms transferring the CBCI to plaintiff;

xxx xxx xxx

15. The detached assignment is patently void and inoperative because the
assignment is without the knowledge and consent of directors of Filriters, and not
duly authorized in writing by the Board, as requiring by Article V, Section 3 of CB
Circular No. 769;

16. The assignment of the CBCI to Philfinance is a personal act of Alfredo


Banaria and not the corporate act of Filriters and such null and void;
a) The assignment was executed without consideration and for that reason, the
assignment is void from the beginning (Article 1409, Civil Code);

b) The assignment was executed without any knowledge and consent of the board of
directors of Filriters;

c) The CBCI constitutes reserve investment of Filriters against liabilities,


which is a requirement under the Insurance Code for its existence as an insurance
company and the pursuit of its business operations. The assignment of the CBCI is
illegal act in the sense of malum in se or malum prohibitum, for anyone to make,
either as corporate or personal act;

d) The transfer of dimunition of reserve investments of Filriters is expressly


prohibited by law, is immoral and against public policy;

e) The assignment of the CBCI has resulted in the capital impairment and in the
solvency deficiency of Filriters (and has in fact helped in placing Filriters under
conservatorship), an inevitable result known to the officer who executed
assignment.

17. Plaintiff had acted in bad faith and with knowledge of the illegality and
invalidity of the assignment.

a) The CBCI No. 891 is not a negotiable instrument and as a certificate of


indebtedness is not payable to bearer but is a registered in the name of Filriters;

b) The provision on transfer of the CBCIs provides that the Central Bank shall
treat the registered owner as the absolute owner and that the value of the
registered certificates shall be payable only to the registered owner; a sufficient
notice to plaintiff that the assignments do not give them the registered owner's
right as absolute owner of the CBCI's;

c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs)


provides that the registered certificates are payable only to the registered owner
(Article II, Section 1).

18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891
by Filriters is not a regular transaction made in the usual of ordinary course of
business;

a) The CBCI constitutes part of the reserve investments of Filriters against


liabilities requires by the Insurance Code and its assignment or transfer is
expressly prohibited by law. There was no attempt to get any clearance or
authorization from the Insurance Commissioner;

b) The assignment by Filriters of the CBCI is clearly not a transaction in the


usual or regular course of its business;

c) The CBCI involved substantial amount and its assignment clearly constitutes
disposition of "all or substantially all" of the assets of Filriters, which
requires the affirmative action of the stockholders (Section 40, Corporation [sic]
Code.7

In its Decision8 dated April 29, 1988, the Regional Trial Court of Manila, Branch
XXXIII found the assignment of CBCI No. D891 in favor of Philfinance, and the
subsequent assignment of the same CBCI by Philfinance in favor of Traders Royal
Bank null and void and of no force and effect. The dispositive portion of the
decision reads:
ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters
Guaranty Assurance Corporation and against the plaintiff Traders Royal Bank:

(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the
subsequent assignment of CBCI by PhilFinance in favor of the plaintiff Traders
Royal Bank as null and void and of no force and effect;

(b) Ordering the respondent Central Bank of the Philippines to disregard the said
assignment and to pay the value of the proceeds of the CBCI No. D891 to the
Filriters Guaranty Assurance Corporation;

(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters
Guaranty Assurance Corp. The sum of P10,000 as attorney's fees; and

(d) to pay the costs.

SO ORDERED.9

The petitioner assailed the decision of the trial court in the Court of Appeals 10,
but their appeals likewise failed. The findings of the fact of the said court are
hereby reproduced:

The records reveal that defendant Filriters is the registered owner of CBCI No.
D891. Under a deed of assignment dated November 27, 1971, Filriters transferred
CBCI No. D891 to Philippine Underwriters Finance Corporation (Philfinance).
Subsequently, Philfinance transferred CBCI No. D891, which was still registered in
the name of Filriters, to appellant Traders Royal Bank (TRB). The transfer was made
under a repurchase agreement dated February 4, 1981, granting Philfinance the right
to repurchase the instrument on or before April 27, 1981. When Philfinance failed
to buy back the note on maturity date, it executed a deed of assignment, dated
April 27, 1981, conveying to appellant TRB all its right and the title to CBCI No.
D891.

Armed with the deed of assignment, TRB then sought the transfer and registration of
CBCI No. D891 in its name before the Security and Servicing Department of the
Central Bank (CB). Central Bank, however, refused to effect the transfer and
registration in view of an adverse claim filed by defendant Filriters.

Left with no other recourse, TRB filed a special civil action for mandamus against
the Central Bank in the Regional Trial Court of Manila. The suit, however, was
subsequently treated by the lower court as a case of interpleader when CB prayed in
its amended answer that Filriters be impleaded as a respondent and the court
adjudge which of them is entitled to the ownership of CBCI No. D891. Failing to get
a favorable judgment. TRB now comes to this Court on appeal. 11

In the appellate court, petitioner argued that the subject CBCI was a negotiable
instrument, and having acquired the said certificate from Philfinance as a holder
in due course, its possession of the same is thus free fro any defect of title of
prior parties and from any defense available to prior parties among themselves, and
it may thus, enforce payment of the instrument for the full amount thereof against
all parties liable thereon. 12

In ignoring said argument, the appellate court that the CBCI is not a negotiable
instrument, since the instrument clearly stated that it was payable to Filriters,
the registered owner, whose name was inscribed thereon, and that the certificate
lacked the words of negotiability which serve as an expression of consent that the
instrument may be transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to Philfinance was
fictitious, having made without consideration, and did not conform to Central Bank
Circular No. 769, series of 1980, better known as the "Rules and Regulations
Governing Central Bank Certificates of Indebtedness", which provided that any
"assignment of registered certificates shall not be valid unless made . . . by the
registered owner thereof in person or by his representative duly authorized in
writing."

Petitioner's claimed interest has no basis, since it was derived from Philfinance
whose interest was inexistent, having acquired the certificate through simulation.
What happened was Philfinance merely borrowed CBCI No. D891 from Filriters, a
sister corporation, to guarantee its financing operations.

Said the Court:

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment
purportedly for and on behalf of Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters to act for the latter. For
lack of such authority, the assignment did not therefore bind Filriters and
violated as the same time Central Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the transfer (People v. Que Po Lay, 94
Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA
778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could
assign or transfer to Traders Royal Bank and which the latter can register with the
Central Bank.

WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-
appellant.

SO ORDERED. 13

Petitioner's present position rests solely on the argument that Philfinance owns
90% of Filriters equity and the two corporations have identical corporate officers,
thus demanding the application of the doctrine or piercing the veil of corporate
fiction, as to give validity to the transfer of the CBCI from registered owner to
petitioner TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as
actual payment to Filriters. Thus, there is no merit to the lower court's ruling
that the transfer of the CBCI from Filriters to Philfinance was null and void for
lack of consideration.

Admittedly, the subject CBCI is not a negotiable instrument in the absence of words
of negotiability within the meaning of the negotiable instruments law (Act 2031).

The pertinent portions of the subject CBCI read:

xxx xxx xxx

The Central Bank of the Philippines (the Bank) for value received, hereby promises
to pay bearer, of if this Certificate of indebtedness be registered, to FILRITERS
GUARANTY ASSURANCE CORPORATION, the registered owner hereof, the principal sum of
FIVE HUNDRED THOUSAND PESOS.

x x x x x x x x x

Properly understood, a certificate of indebtedness pertains to certificates for the


creation and maintenance of a permanent improvement revolving fund, is similar to a
"bond," (82 Minn. 202). Being equivalent to a bond, it is properly understood as
acknowledgment of an obligation to pay a fixed sum of money. It is usually used for
the purpose of long term loans.

The appellate court ruled that the subject CBCI is not a negotiable instrument,
stating that:

As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance
Corporation, the registered owner hereof." Very clearly, the instrument is payable
only to Filriters, the registered owner, whose name is inscribed thereon. It lacks
the words of negotiability which should have served as an expression of consent
that the instrument may be transferred by negotiation.15

A reading of the subject CBCI indicates that the same is payable to FILRITERS
GUARANTY ASSURANCE CORPORATION, and to no one else, thus, discounting the
petitioner's submission that the same is a negotiable instrument, and that it is a
holder in due course of the certificate.

The language of negotiability which characterize a negotiable paper as a credit


instrument is its freedom to circulate as a substitute for money. Hence, freedom of
negotiability is the touchtone relating to the protection of holders in due course,
and the freedom of negotiability is the foundation for the protection which the law
throws around a holder in due course (11 Am. Jur. 2d, 32). This freedom in
negotiability is totally absent in a certificate indebtedness as it merely to pay a
sum of money to a specified person or entity for a period of time.

As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:

The accepted rule is that the negotiability or non-negotiability of an instrument


is determined from the writing, that is, from the face of the instrument itself. In
the construction of a bill or note, the intention of the parties is to control, if
it can be legally ascertained. While the writing may be read in the light of
surrounding circumstance in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only
outward and visible expression of their meaning, no other words are to be added to
it or substituted in its stead. The duty of the court in such case is to ascertain,
not what the parties may have secretly intended as contradistinguished from what
their words express, but what is the meaning of the words they have used. What the
parties meant must be determined by what they said.

Thus, the transfer of the instrument from Philfinance to TRB was merely an
assignment, and is not governed by the negotiable instruments law. The pertinent
question then is, was the transfer of the CBCI from Filriters to Philfinance and
subsequently from Philfinance to TRB, in accord with existing law, so as to entitle
TRB to have the CBCI registered in its name with the Central Bank?

The following are the appellate court's pronouncements on the matter:

Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891
is defective since it acquired the instrument from Filriters fictitiously. Although
the deed of assignment stated that the transfer was for "value received", there was
really no consideration involved. What happened was Philfinance merely borrowed
CBCI No. D891 from Filriters, a sister corporation. Thus, for lack of any
consideration, the assignment made is a complete nullity.

What is more, We find that the transfer made by Filriters to Philfinance did not
conform to Central Bank Circular No. 769, series of 1980, otherwise known as the
"Rules and Regulations Governing Central Bank Certificates of Indebtedness", under
which the note was issued. Published in the Official Gazette on November 19, 1980,
Section 3 thereof provides that any assignment of registered certificates shall not
be valid unless made . . . by the registered owner thereof in person or by his
representative duly authorized in writing.

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment
purportedly for and on behalf of Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters to act for the latter. For
lack of such authority, the assignment did not therefore bind Filriters and
violated at the same time Central Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the transfer (People vs. Que Po Lay,
94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA
778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could
assign or transfer to Traders Royal Bank and which the latter can register with the
Central Bank

Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as
the respondent Filriters and Philfinance, though separate corporate entities on
paper, have used their corporate fiction to defraud TRB into purchasing the subject
CBCI, which purchase now is refused registration by the Central Bank.

Says the petitioner;

Since Philfinance own about 90% of Filriters and the two companies have the same
corporate officers, if the principle of piercing the veil of corporate entity were
to be applied in this case, then TRB's payment to Philfinance for the CBCI
purchased by it could just as well be considered a payment to Filriters, the
registered owner of the CBCI as to bar the latter from claiming, as it has, that it
never received any payment for that CBCI sold and that said CBCI was sold without
its authority.

xxx xxx xxx

We respectfully submit that, considering that the Court of Appeals has held that
the CBCI was merely borrowed by Philfinance from Filriters, a sister corporation,
to guarantee its (Philfinance's) financing operations, if it were to be consistent
therewith, on the issued raised by TRB that there was a piercing a veil of
corporate entity, the Court of Appeals should have ruled that such veil of
corporate entity was, in fact, pierced, and the payment by TRB to Philfinance
should be construed as payment to Filriters. 17

We disagree with Petitioner.

Petitioner cannot put up the excuse of piercing the veil of corporate entity, as
this merely an equitable remedy, and may be awarded only in cases when the
corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime or where a corporation is a mere alter ego or business
conduit of a person. 18

Peiercing the veil of corporate entity requires the court to see through the
protective shroud which exempts its stockholders from liabilities that ordinarily,
they could be subject to, or distinguished one corporation from a seemingly
separate one, were it not for the existing corporate fiction. But to do this, the
court must be sure that the corporate fiction was misused, to such an extent that
injustice, fraud, or crime was committed upon another, disregarding, thus, his,
her, or its rights. It is the protection of the interests of innocent third persons
dealing with the corporate entity which the law aims to protect by this doctrine.

The corporate separateness between Filriters and Philfinance remains, despite the
petitioners insistence on the contrary. For one, other than the allegation that
Filriters is 90% owned by Philfinance, and the identity of one shall be maintained
as to the other, there is nothing else which could lead the court under
circumstance to disregard their corporate personalities.

Though it is true that when valid reasons exist, the legal fiction that a
corporation is an entity with a juridical personality separate from its
stockholders and from other corporations may be disregarded, 19 in the absence of
such grounds, the general rule must upheld. The fact that Filfinance owns majority
shares in Filriters is not by itself a ground to disregard the independent
corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of Internal
Revenue, 20 the mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not of itself a
sufficient reason for disregarding the fiction of separate corporate personalities.

In the case at bar, there is sufficient showing that the petitioner was not
defrauded at all when it acquired the subject certificate of indebtedness from
Philfinance.

On its face the subject certificates states that it is registered in the name of
Filriters. This should have put the petitioner on notice, and prompted it to
inquire from Filriters as to Philfinance's title over the same or its authority to
assign the certificate. As it is, there is no showing to the effect that petitioner
had any dealings whatsoever with Filriters, nor did it make inquiries as to the
ownership of the certificate.

The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:

TRANSFER. This Certificate shall pass by delivery unless it is registered in the


owner's name at any office of the Bank or any agency duly authorized by the Bank,
and such registration is noted hereon. After such registration no transfer thereof
shall be valid unless made at said office (where the Certificates has been
registered) by the registered owner hereof, in person, or by his attorney, duly
authorized in writing and similarly noted hereon and upon payment of a nominal
transfer fee which may be required, a new Certificate shall be issued to the
transferee of the registered owner thereof. The bank or any agency duly authorized
by the Bank may deem and treat the bearer of this Certificate, or if this
Certificate is registered as herein authorized, the person in whose name the same
is registered as the absolute owner of this Certificate, for the purpose of
receiving payment hereof, or on account hereof, and for all other purpose whether
or not this Certificate shall be overdue.

This is notice to petitioner to secure from Filriters a written authorization for


the transfer or to require Philfinance to submit such an authorization from
Filriters.

Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The
fact that a non-owner was disposing of the registered CBCI owned by another entity
was a good reason for petitioner to verify of inquire as to the title Philfinance
to dispose to the CBCI.

Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21,
known as the Rules and Regulations Governing Central Bank Certificates of
Indebtedness, Section 3, Article V of which provides that:

Sec. 3. Assignment of Registered Certificates. — Assignment of registered


certificates shall not be valid unless made at the office where the same have been
issued and registered or at the Securities Servicing Department, Central Bank of
the Philippines, and by the registered owner thereof, in person or by his
representative, duly authorized in writing. For this purpose, the transferee may be
designated as the representative of the registered owner.

Petitioner, being a commercial bank, cannot feign ignorance of Central Bank


Circular 769, and its requirements. An entity which deals with corporate agents
within circumstances showing that the agents are acting in excess of corporate
authority, may not hold the corporation liable. 22 This is only fair, as everyone
must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith. 23

The transfer made by Filriters to Philfinance did not conform to the said. Central
Bank Circular, which for all intents, is considered part of the law. As found by
the courts a quo, Alfredo O. Banaria, who had signed the deed of assignment from
Filriters to Philfinance, purportedly for and in favor of Filriters, did not have
the necessary written authorization from the Board of Directors of Filriters to act
for the latter. As it is, the sale from Filriters to Philfinance was fictitious,
and therefore void and inexistent, as there was no consideration for the same. This
is fatal to the petitioner's cause, for then, Philfinance had no title over the
subject certificate to convey the Traders Royal Bank. Nemo potest nisi quod de jure
potest — no man can do anything except what he can do lawfully.

Concededly, the subject CBCI was acquired by Filriters to form part of its legal
and capital reserves, which are required by law 24 to be maintained at a mandated
level. This was pointed out by Elias Garcia, Manager-in-Charge of respondent
Filriters, in his testimony given before the court on May 30, 1986.

Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No.
D891 in the face value of P5000,000.00 subject of this case?

A Yes, sir.

Q Why do you know this?

A Well, this was CBCI of the company sought to be examined by the Insurance
Commission sometime in early 1981 and this CBCI No. 891 was among the CBCI's that
were found to be missing.

Q Let me take you back further before 1981. Did you have the knowledge of this
CBCI No. 891 before 1981?

A Yes, sir. This CBCI is an investment of Filriters required by the Insurance


Commission as legal reserve of the company.

Q Legal reserve for the purpose of what?

A Well, you see, the Insurance companies are required to put up legal reserves
under Section 213 of the Insurance Code equivalent to 40 percent of the premiums
receipt and further, the Insurance Commission requires this reserve to be invested
preferably in government securities or government binds. This is how this CBCI came
to be purchased by the company.

It cannot, therefore, be taken out of the said funds, without violating the
requirements of the law. Thus, the anauthorized use or distribution of the same by
a corporate officer of Filriters cannot bind the said corporation, not without the
approval of its Board of Directors, and the maintenance of the required reserve
fund.

Consequently, the title of Filriters over the subject certificate of indebtedness


must be upheld over the claimed interest of Traders Royal Bank.
ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January
29, 1990 is hereby AFFIRMED.

SO ORDERED.

Regalado, Romero and Mendoza, JJ., concur.

Puno, J., took no part.

Footnotes

1 Justice Ricardo L. Pronove, Jr., ponente; concurred in by Justices Alfredo L.


Benipayo and Serafain V.C. Guingona, p. 18, Rollo.

2 P. 143, Record.

3 Ibid. at p. 146.

4 Ibid., at p. 148.

5 P. 1, Record.

6 P. 75, Record.

7 Answer, p. 97, Record.

8 P. 315, Record.

9 Pp. 16-17, RTC Decision, p. 330, Rollo.

10 Annex "A". Petition, supra.

11 Court of Appeals Decision, pp. 18-19, Rollo.

12 Section 57. Negotiable Instruments Law.

13 Petition, Annex "A", pp. 21-22, Rollo.

14 Ibid.

15 Campos and Campos, Negotiable Instruments Law, p. 38, 1971 ed.

16 G.R. No. 97753, August 10, 1992, 212 SCRA 448.

17 Petition

18 Yu vs. National Labor Relations Commission 245 SCRA 134.

19 Guatson International Travel and Tours, Inc. vs. National Labor Relations
Commission, 230 SCRA 815.

20 2 SCRA 632.

21 Official Gazette 9370.

22 See Article 1883, Civil Code.

23 See Article 19, Civil Code.


24 Sec. 213 Every insurance company, other than life, shall maintain a
reserve fro unearned premiums on its policies in force, which shall be charged as a
liability in any determination of its financial condition. Such reserve shall be
equal to forty per centum of the gross permiums, less returns and cancellations,
received on policies or risks having more than a year to run; Provided That for
marine cargo risks, the reserve shall be equal to forty per centum of the premiums
written in the policies upon yearly risks, and the full amount of premiums written
during the last two months of the calendar year upon all other marine risks not
terminated. Presidential Decree No. 612 (The Insurance Code of the Philippines).

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 93397 March 3, 1997

TRADERS ROYAL BANK, petitioner,


vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL BANK of the
PHILIPPINES, respondents.

TORRES, JR., J.:

Assailed in this Petition for Review on Certiorari is the Decision of the


respondent Court of Appeals dated January 29, 1990,1 affirming the nullity of the
transfer of Central Bank Certificate of Indebtedness (CBCI) No. D891,2 with a face
value of P500,000.00, from the Philippine Underwriters Finance Corporation
(Philfinance) to the petitioner Trader's Royal Bank (TRB), under a Repurchase
Agreement3 dated February 4, 1981, and a Detached Assignment4 dated April 27, 1981.

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch
32, the action was originally filed as a Petition for Mandamus5 under Rule 65 of
the Rules of Court, to compel the Central Bank of the Philippines to register the
transfer of the subject CBCI to petitioner Traders Royal Bank (TRB).

In the said petition, TRB stated that:

3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters)


executed a "Detached Assignment" . . ., whereby Filriters, as registered owner,
sold, transferred, assigned and delivered unto Philippine Underwriters Finance
Corporation (Philfinance) all its rights and title to Central Bank Certificates of
Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000) and having an aggregate
value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);

4. The aforesaid Detached Assignment (Annex "A") contains an express


authorization executed by the transferor intended to complete the assignment
through the registration of the transfer in the name of PhilFinance, which
authorization is specifically phrased as follows: '(Filriters) hereby irrevocably
authorized the said issuer (Central Bank) to transfer the said bond/certificates on
the books of its fiscal agent;

5. On February 4, 1981, petitioner entered into a Repurchase Agreement with


PhilFinance . . ., whereby, for and in consideration of the sum of PESOS: FIVE
HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and delivered to
petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of
P500,000.00 . . ., which CBCI was among those previously acquired by PhilFinance
from Filriters as averred in paragraph 3 of the Petition;

6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance


agreed to repurchase CBCI Serial No. D891 (Annex "C"), at the stipulated price of
PESOS: FIVE HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100
(P519,361.11) on April 27, 1981;

7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity,


April 27, 1981, when the checks it issued in favor of petitioner were dishonored
for insufficient funds;

8. Owing to the default of PhilFinance, it executed a Detached Assignment in


favor of the Petitioner to enable the latter to have its title completed and
registered in the books of the respondent. And by means of said Detachment,
Philfinance transferred and assigned all, its rights and title in the said CBCI
(Annex "C") to petitioner and, furthermore, it did thereby "irrevocably authorize
the said issuer (respondent herein) to transfer the said bond/certificate on the
books of its fiscal agent." . . .

9. Petitioner presented the CBCI (Annex "C"), together with the two (2)
aforementioned Detached Assignments (Annexes "B" and "D"), to the Securities
Servicing Department of the respondent, and requested the latter to effect the
transfer of the CBCI on its books and to issue a new certificate in the name of
petitioner as absolute owner thereof;

10. Respondent failed and refused to register the transfer as requested, and
continues to do so notwithstanding petitioner's valid and just title over the same
and despite repeated demands in writing, the latest of which is hereto attached as
Annex "E" and made an integral part hereof;

11. The express provisions governing the transfer of the CBCI were substantially
complied with the petitioner's request for registration, to wit:

"No transfer thereof shall be valid unless made at said office (where the
Certificate has been registered) by the registered owner hereof, in person or by
his attorney duly authorized in writing, and similarly noted hereon, and upon
payment of a nominal transfer fee which may be required, a new Certificate shall be
issued to the transferee of the registered holder thereof."

and, without a doubt, the Detached Assignments presented to respondent were


sufficient authorizations in writing executed by the registered owner, Filriters,
and its transferee, PhilFinance, as required by the above-quoted provision;

12. Upon such compliance with the aforesaid requirements, the ministerial duties
of registering a transfer of ownership over the CBCI and issuing a new certificate
to the transferee devolves upon the respondent;

Upon these assertions, TRB prayed for the registration by the Central Bank of the
subject CBCI in its name.

On December 4, 1984, the Regional Trial Court the case took cognizance of the
defendant Central Bank of the Philippines' Motion for Admission of Amended Answer
with Counter Claim for Interpleader6 thereby calling to fore the respondent
Filriters Guaranty Assurance Corporation (Filriters), the registered owner of the
subject CBCI as respondent.

For its part, Filriters interjected as Special Defenses the following:

11. Respondent is the registered owner of CBCI No. 891;

12. The CBCI constitutes part of the reserve investment against liabilities
required of respondent as an insurance company under the Insurance Code;

13. Without any consideration or benefit whatsoever to Filriters, in violation of


law and the trust fund doctrine and to the prejudice of policyholders and to all
who have present or future claim against policies issued by Filriters, Alfredo
Banaria, then Senior Vice-President-Treasury of Filriters, without any board
resolution, knowledge or consent of the board of directors of Filriters, and
without any clearance or authorization from the Insurance Commissioner, executed a
detached assignment purportedly assigning CBCI No. 891 to Philfinance;

xxx xxx xxx

14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar


Jacobe, Vice-President-Treasury of Filriters (both of whom were holding the same
positions in Philfinance), without any consideration or benefit redounding to
Filriters and to the grave prejudice of Filriters, its policy holders and all who
have present or future claims against its policies, executed similar detached
assignment forms transferring the CBCI to plaintiff;

xxx xxx xxx

15. The detached assignment is patently void and inoperative because the
assignment is without the knowledge and consent of directors of Filriters, and not
duly authorized in writing by the Board, as requiring by Article V, Section 3 of CB
Circular No. 769;

16. The assignment of the CBCI to Philfinance is a personal act of Alfredo


Banaria and not the corporate act of Filriters and such null and void;

a) The assignment was executed without consideration and for that reason, the
assignment is void from the beginning (Article 1409, Civil Code);

b) The assignment was executed without any knowledge and consent of the board of
directors of Filriters;

c) The CBCI constitutes reserve investment of Filriters against liabilities,


which is a requirement under the Insurance Code for its existence as an insurance
company and the pursuit of its business operations. The assignment of the CBCI is
illegal act in the sense of malum in se or malum prohibitum, for anyone to make,
either as corporate or personal act;

d) The transfer of dimunition of reserve investments of Filriters is expressly


prohibited by law, is immoral and against public policy;

e) The assignment of the CBCI has resulted in the capital impairment and in the
solvency deficiency of Filriters (and has in fact helped in placing Filriters under
conservatorship), an inevitable result known to the officer who executed
assignment.
17. Plaintiff had acted in bad faith and with knowledge of the illegality and
invalidity of the assignment.

a) The CBCI No. 891 is not a negotiable instrument and as a certificate of


indebtedness is not payable to bearer but is a registered in the name of Filriters;

b) The provision on transfer of the CBCIs provides that the Central Bank shall
treat the registered owner as the absolute owner and that the value of the
registered certificates shall be payable only to the registered owner; a sufficient
notice to plaintiff that the assignments do not give them the registered owner's
right as absolute owner of the CBCI's;

c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs)


provides that the registered certificates are payable only to the registered owner
(Article II, Section 1).

18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891
by Filriters is not a regular transaction made in the usual of ordinary course of
business;

a) The CBCI constitutes part of the reserve investments of Filriters against


liabilities requires by the Insurance Code and its assignment or transfer is
expressly prohibited by law. There was no attempt to get any clearance or
authorization from the Insurance Commissioner;

b) The assignment by Filriters of the CBCI is clearly not a transaction in the


usual or regular course of its business;

c) The CBCI involved substantial amount and its assignment clearly constitutes
disposition of "all or substantially all" of the assets of Filriters, which
requires the affirmative action of the stockholders (Section 40, Corporation [sic]
Code.7

In its Decision8 dated April 29, 1988, the Regional Trial Court of Manila, Branch
XXXIII found the assignment of CBCI No. D891 in favor of Philfinance, and the
subsequent assignment of the same CBCI by Philfinance in favor of Traders Royal
Bank null and void and of no force and effect. The dispositive portion of the
decision reads:

ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters


Guaranty Assurance Corporation and against the plaintiff Traders Royal Bank:

(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the
subsequent assignment of CBCI by PhilFinance in favor of the plaintiff Traders
Royal Bank as null and void and of no force and effect;

(b) Ordering the respondent Central Bank of the Philippines to disregard the said
assignment and to pay the value of the proceeds of the CBCI No. D891 to the
Filriters Guaranty Assurance Corporation;

(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters
Guaranty Assurance Corp. The sum of P10,000 as attorney's fees; and

(d) to pay the costs.

SO ORDERED.9

The petitioner assailed the decision of the trial court in the Court of Appeals 10,
but their appeals likewise failed. The findings of the fact of the said court are
hereby reproduced:

The records reveal that defendant Filriters is the registered owner of CBCI No.
D891. Under a deed of assignment dated November 27, 1971, Filriters transferred
CBCI No. D891 to Philippine Underwriters Finance Corporation (Philfinance).
Subsequently, Philfinance transferred CBCI No. D891, which was still registered in
the name of Filriters, to appellant Traders Royal Bank (TRB). The transfer was made
under a repurchase agreement dated February 4, 1981, granting Philfinance the right
to repurchase the instrument on or before April 27, 1981. When Philfinance failed
to buy back the note on maturity date, it executed a deed of assignment, dated
April 27, 1981, conveying to appellant TRB all its right and the title to CBCI No.
D891.

Armed with the deed of assignment, TRB then sought the transfer and registration of
CBCI No. D891 in its name before the Security and Servicing Department of the
Central Bank (CB). Central Bank, however, refused to effect the transfer and
registration in view of an adverse claim filed by defendant Filriters.

Left with no other recourse, TRB filed a special civil action for mandamus against
the Central Bank in the Regional Trial Court of Manila. The suit, however, was
subsequently treated by the lower court as a case of interpleader when CB prayed in
its amended answer that Filriters be impleaded as a respondent and the court
adjudge which of them is entitled to the ownership of CBCI No. D891. Failing to get
a favorable judgment. TRB now comes to this Court on appeal. 11

In the appellate court, petitioner argued that the subject CBCI was a negotiable
instrument, and having acquired the said certificate from Philfinance as a holder
in due course, its possession of the same is thus free fro any defect of title of
prior parties and from any defense available to prior parties among themselves, and
it may thus, enforce payment of the instrument for the full amount thereof against
all parties liable thereon. 12

In ignoring said argument, the appellate court that the CBCI is not a negotiable
instrument, since the instrument clearly stated that it was payable to Filriters,
the registered owner, whose name was inscribed thereon, and that the certificate
lacked the words of negotiability which serve as an expression of consent that the
instrument may be transferred by negotiation.

Obviously, the assignment of the certificate from Filriters to Philfinance was


fictitious, having made without consideration, and did not conform to Central Bank
Circular No. 769, series of 1980, better known as the "Rules and Regulations
Governing Central Bank Certificates of Indebtedness", which provided that any
"assignment of registered certificates shall not be valid unless made . . . by the
registered owner thereof in person or by his representative duly authorized in
writing."

Petitioner's claimed interest has no basis, since it was derived from Philfinance
whose interest was inexistent, having acquired the certificate through simulation.
What happened was Philfinance merely borrowed CBCI No. D891 from Filriters, a
sister corporation, to guarantee its financing operations.

Said the Court:

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment
purportedly for and on behalf of Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters to act for the latter. For
lack of such authority, the assignment did not therefore bind Filriters and
violated as the same time Central Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the transfer (People v. Que Po Lay, 94
Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA
778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could
assign or transfer to Traders Royal Bank and which the latter can register with the
Central Bank.

WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-
appellant.

SO ORDERED. 13

Petitioner's present position rests solely on the argument that Philfinance owns
90% of Filriters equity and the two corporations have identical corporate officers,
thus demanding the application of the doctrine or piercing the veil of corporate
fiction, as to give validity to the transfer of the CBCI from registered owner to
petitioner TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as
actual payment to Filriters. Thus, there is no merit to the lower court's ruling
that the transfer of the CBCI from Filriters to Philfinance was null and void for
lack of consideration.

Admittedly, the subject CBCI is not a negotiable instrument in the absence of words
of negotiability within the meaning of the negotiable instruments law (Act 2031).

The pertinent portions of the subject CBCI read:

xxx xxx xxx

The Central Bank of the Philippines (the Bank) for value received, hereby promises
to pay bearer, of if this Certificate of indebtedness be registered, to FILRITERS
GUARANTY ASSURANCE CORPORATION, the registered owner hereof, the principal sum of
FIVE HUNDRED THOUSAND PESOS.

x x x x x x x x x

Properly understood, a certificate of indebtedness pertains to certificates for the


creation and maintenance of a permanent improvement revolving fund, is similar to a
"bond," (82 Minn. 202). Being equivalent to a bond, it is properly understood as
acknowledgment of an obligation to pay a fixed sum of money. It is usually used for
the purpose of long term loans.

The appellate court ruled that the subject CBCI is not a negotiable instrument,
stating that:

As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance
Corporation, the registered owner hereof." Very clearly, the instrument is payable
only to Filriters, the registered owner, whose name is inscribed thereon. It lacks
the words of negotiability which should have served as an expression of consent
that the instrument may be transferred by negotiation.15

A reading of the subject CBCI indicates that the same is payable to FILRITERS
GUARANTY ASSURANCE CORPORATION, and to no one else, thus, discounting the
petitioner's submission that the same is a negotiable instrument, and that it is a
holder in due course of the certificate.

The language of negotiability which characterize a negotiable paper as a credit


instrument is its freedom to circulate as a substitute for money. Hence, freedom of
negotiability is the touchtone relating to the protection of holders in due course,
and the freedom of negotiability is the foundation for the protection which the law
throws around a holder in due course (11 Am. Jur. 2d, 32). This freedom in
negotiability is totally absent in a certificate indebtedness as it merely to pay a
sum of money to a specified person or entity for a period of time.

As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:

The accepted rule is that the negotiability or non-negotiability of an instrument


is determined from the writing, that is, from the face of the instrument itself. In
the construction of a bill or note, the intention of the parties is to control, if
it can be legally ascertained. While the writing may be read in the light of
surrounding circumstance in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only
outward and visible expression of their meaning, no other words are to be added to
it or substituted in its stead. The duty of the court in such case is to ascertain,
not what the parties may have secretly intended as contradistinguished from what
their words express, but what is the meaning of the words they have used. What the
parties meant must be determined by what they said.

Thus, the transfer of the instrument from Philfinance to TRB was merely an
assignment, and is not governed by the negotiable instruments law. The pertinent
question then is, was the transfer of the CBCI from Filriters to Philfinance and
subsequently from Philfinance to TRB, in accord with existing law, so as to entitle
TRB to have the CBCI registered in its name with the Central Bank?

The following are the appellate court's pronouncements on the matter:

Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891
is defective since it acquired the instrument from Filriters fictitiously. Although
the deed of assignment stated that the transfer was for "value received", there was
really no consideration involved. What happened was Philfinance merely borrowed
CBCI No. D891 from Filriters, a sister corporation. Thus, for lack of any
consideration, the assignment made is a complete nullity.

What is more, We find that the transfer made by Filriters to Philfinance did not
conform to Central Bank Circular No. 769, series of 1980, otherwise known as the
"Rules and Regulations Governing Central Bank Certificates of Indebtedness", under
which the note was issued. Published in the Official Gazette on November 19, 1980,
Section 3 thereof provides that any assignment of registered certificates shall not
be valid unless made . . . by the registered owner thereof in person or by his
representative duly authorized in writing.

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment
purportedly for and on behalf of Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters to act for the latter. For
lack of such authority, the assignment did not therefore bind Filriters and
violated at the same time Central Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the transfer (People vs. Que Po Lay,
94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA
778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could
assign or transfer to Traders Royal Bank and which the latter can register with the
Central Bank

Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as
the respondent Filriters and Philfinance, though separate corporate entities on
paper, have used their corporate fiction to defraud TRB into purchasing the subject
CBCI, which purchase now is refused registration by the Central Bank.
Says the petitioner;

Since Philfinance own about 90% of Filriters and the two companies have the same
corporate officers, if the principle of piercing the veil of corporate entity were
to be applied in this case, then TRB's payment to Philfinance for the CBCI
purchased by it could just as well be considered a payment to Filriters, the
registered owner of the CBCI as to bar the latter from claiming, as it has, that it
never received any payment for that CBCI sold and that said CBCI was sold without
its authority.

xxx xxx xxx

We respectfully submit that, considering that the Court of Appeals has held that
the CBCI was merely borrowed by Philfinance from Filriters, a sister corporation,
to guarantee its (Philfinance's) financing operations, if it were to be consistent
therewith, on the issued raised by TRB that there was a piercing a veil of
corporate entity, the Court of Appeals should have ruled that such veil of
corporate entity was, in fact, pierced, and the payment by TRB to Philfinance
should be construed as payment to Filriters. 17

We disagree with Petitioner.

Petitioner cannot put up the excuse of piercing the veil of corporate entity, as
this merely an equitable remedy, and may be awarded only in cases when the
corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime or where a corporation is a mere alter ego or business
conduit of a person. 18

Peiercing the veil of corporate entity requires the court to see through the
protective shroud which exempts its stockholders from liabilities that ordinarily,
they could be subject to, or distinguished one corporation from a seemingly
separate one, were it not for the existing corporate fiction. But to do this, the
court must be sure that the corporate fiction was misused, to such an extent that
injustice, fraud, or crime was committed upon another, disregarding, thus, his,
her, or its rights. It is the protection of the interests of innocent third persons
dealing with the corporate entity which the law aims to protect by this doctrine.

The corporate separateness between Filriters and Philfinance remains, despite the
petitioners insistence on the contrary. For one, other than the allegation that
Filriters is 90% owned by Philfinance, and the identity of one shall be maintained
as to the other, there is nothing else which could lead the court under
circumstance to disregard their corporate personalities.

Though it is true that when valid reasons exist, the legal fiction that a
corporation is an entity with a juridical personality separate from its
stockholders and from other corporations may be disregarded, 19 in the absence of
such grounds, the general rule must upheld. The fact that Filfinance owns majority
shares in Filriters is not by itself a ground to disregard the independent
corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of Internal
Revenue, 20 the mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not of itself a
sufficient reason for disregarding the fiction of separate corporate personalities.

In the case at bar, there is sufficient showing that the petitioner was not
defrauded at all when it acquired the subject certificate of indebtedness from
Philfinance.

On its face the subject certificates states that it is registered in the name of
Filriters. This should have put the petitioner on notice, and prompted it to
inquire from Filriters as to Philfinance's title over the same or its authority to
assign the certificate. As it is, there is no showing to the effect that petitioner
had any dealings whatsoever with Filriters, nor did it make inquiries as to the
ownership of the certificate.

The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:

TRANSFER. This Certificate shall pass by delivery unless it is registered in the


owner's name at any office of the Bank or any agency duly authorized by the Bank,
and such registration is noted hereon. After such registration no transfer thereof
shall be valid unless made at said office (where the Certificates has been
registered) by the registered owner hereof, in person, or by his attorney, duly
authorized in writing and similarly noted hereon and upon payment of a nominal
transfer fee which may be required, a new Certificate shall be issued to the
transferee of the registered owner thereof. The bank or any agency duly authorized
by the Bank may deem and treat the bearer of this Certificate, or if this
Certificate is registered as herein authorized, the person in whose name the same
is registered as the absolute owner of this Certificate, for the purpose of
receiving payment hereof, or on account hereof, and for all other purpose whether
or not this Certificate shall be overdue.

This is notice to petitioner to secure from Filriters a written authorization for


the transfer or to require Philfinance to submit such an authorization from
Filriters.

Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The
fact that a non-owner was disposing of the registered CBCI owned by another entity
was a good reason for petitioner to verify of inquire as to the title Philfinance
to dispose to the CBCI.

Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21,
known as the Rules and Regulations Governing Central Bank Certificates of
Indebtedness, Section 3, Article V of which provides that:

Sec. 3. Assignment of Registered Certificates. — Assignment of registered


certificates shall not be valid unless made at the office where the same have been
issued and registered or at the Securities Servicing Department, Central Bank of
the Philippines, and by the registered owner thereof, in person or by his
representative, duly authorized in writing. For this purpose, the transferee may be
designated as the representative of the registered owner.

Petitioner, being a commercial bank, cannot feign ignorance of Central Bank


Circular 769, and its requirements. An entity which deals with corporate agents
within circumstances showing that the agents are acting in excess of corporate
authority, may not hold the corporation liable. 22 This is only fair, as everyone
must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith. 23

The transfer made by Filriters to Philfinance did not conform to the said. Central
Bank Circular, which for all intents, is considered part of the law. As found by
the courts a quo, Alfredo O. Banaria, who had signed the deed of assignment from
Filriters to Philfinance, purportedly for and in favor of Filriters, did not have
the necessary written authorization from the Board of Directors of Filriters to act
for the latter. As it is, the sale from Filriters to Philfinance was fictitious,
and therefore void and inexistent, as there was no consideration for the same. This
is fatal to the petitioner's cause, for then, Philfinance had no title over the
subject certificate to convey the Traders Royal Bank. Nemo potest nisi quod de jure
potest — no man can do anything except what he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part of its legal
and capital reserves, which are required by law 24 to be maintained at a mandated
level. This was pointed out by Elias Garcia, Manager-in-Charge of respondent
Filriters, in his testimony given before the court on May 30, 1986.

Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No.
D891 in the face value of P5000,000.00 subject of this case?

A Yes, sir.

Q Why do you know this?

A Well, this was CBCI of the company sought to be examined by the Insurance
Commission sometime in early 1981 and this CBCI No. 891 was among the CBCI's that
were found to be missing.

Q Let me take you back further before 1981. Did you have the knowledge of this
CBCI No. 891 before 1981?

A Yes, sir. This CBCI is an investment of Filriters required by the Insurance


Commission as legal reserve of the company.

Q Legal reserve for the purpose of what?

A Well, you see, the Insurance companies are required to put up legal reserves
under Section 213 of the Insurance Code equivalent to 40 percent of the premiums
receipt and further, the Insurance Commission requires this reserve to be invested
preferably in government securities or government binds. This is how this CBCI came
to be purchased by the company.

It cannot, therefore, be taken out of the said funds, without violating the
requirements of the law. Thus, the anauthorized use or distribution of the same by
a corporate officer of Filriters cannot bind the said corporation, not without the
approval of its Board of Directors, and the maintenance of the required reserve
fund.

Consequently, the title of Filriters over the subject certificate of indebtedness


must be upheld over the claimed interest of Traders Royal Bank.

ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January
29, 1990 is hereby AFFIRMED.

SO ORDERED.

Regalado, Romero and Mendoza, JJ., concur.

Puno, J., took no part.

Footnotes

1 Justice Ricardo L. Pronove, Jr., ponente; concurred in by Justices Alfredo L.


Benipayo and Serafain V.C. Guingona, p. 18, Rollo.

2 P. 143, Record.

3 Ibid. at p. 146.

4 Ibid., at p. 148.
5 P. 1, Record.

6 P. 75, Record.

7 Answer, p. 97, Record.

8 P. 315, Record.

9 Pp. 16-17, RTC Decision, p. 330, Rollo.

10 Annex "A". Petition, supra.

11 Court of Appeals Decision, pp. 18-19, Rollo.

12 Section 57. Negotiable Instruments Law.

13 Petition, Annex "A", pp. 21-22, Rollo.

14 Ibid.

15 Campos and Campos, Negotiable Instruments Law, p. 38, 1971 ed.

16 G.R. No. 97753, August 10, 1992, 212 SCRA 448.

17 Petition

18 Yu vs. National Labor Relations Commission 245 SCRA 134.

19 Guatson International Travel and Tours, Inc. vs. National Labor Relations
Commission, 230 SCRA 815.

20 2 SCRA 632.

21 Official Gazette 9370.

22 See Article 1883, Civil Code.

23 See Article 19, Civil Code.

24 Sec. 213 Every insurance company, other than life, shall maintain a
reserve fro unearned premiums on its policies in force, which shall be charged as a
liability in any determination of its financial condition. Such reserve shall be
equal to forty per centum of the gross permiums, less returns and cancellations,
received on policies or risks having more than a year to run; Provided That for
marine cargo risks, the reserve shall be equal to forty per centum of the premiums
written in the policies upon yearly risks, and the full amount of premiums written
during the last two months of the calendar year upon all other marine risks not
terminated. Presidential Decree No. 612 (The Insurance Code of the Philippines).

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila
EN BANC

G.R. No. L-7271 August 30, 1957

PHILIPPINE NATIONAL BANK, plaintiff-appellant,


vs.
JOSE ZULUETA, defendant-appellee.

Natalio M. Balboa and Ramon B. de los Reyes for appellant.


Lorenzo F. Miravite for appellee.

BENGZON, J.:

In the Manila court of first instance, the Philippine National Bank sued the
defendant upon a letter of credit and a draft for the amount of $14,449.15.
Although willing to pay the equivalent in pesos of the draft, plus bank charges,
the defendant objected to the 17% excise tax imposed by Republic Act No. 601 which
the Bank tried to collect. Both documents, he contended, had been issued and had
matured before the approval of said Act, therefore the excise tax should not be
charged.

After the trial, the court rendered judgment exempting defendant from the 17%
excise tax; but ordered him to deliver to plaintiff the sum of P37,622.11 plus
daily interest of P3.9938 on P29,154.55 beginning from January 9, 1953.

The plaintiff appealed, insisting on the right to collect 17% excise or exchange
tax. This is the only issue between the parties now.

For a statement of the facts we may quote from plaintiff's brief. "On October 26,
1948, Defendant-Appellee applied for a commercial letter of credit with Plaintiff-
Appellant, Philippine National Bank (Manila) and was granted L/C No. 35171 (Exhibit
"B") on November 6, 1948, in favor of Otis Elevator Co., 260 Eleventh Avenue, New
York City, U.S.A., for $14,449.15 for the purchase of an electric passenger
elevator; on May 17, 1949, and under the said letter of credit (Exhibit "B"), Otis
Elevator Co. drew a 90 day sight draft for $14,449.15 (Exhibit "A") which draft was
duly presented to and accepted by Defendant-Appellee on July 6, 1949. Said
acceptance matured on October 4, 1949. Upon Defendant-Appellee's signing a 90 day
trust receipt (Exhibit "C") on June 3, 1949, Plaintiff-Appellant released to
Defendant-Appellee the covering documents of the shipment. In the meantime, debit
advice (Exhibit "G") was received from Plaintiff-Appellant's New York Agency to the
effect that it advanced or paid the draft (Exhibit "A") to Otis Elevator Co. on May
17, 1949, and charged Plaintiff-Appellant the sum of $14,467.21 representing the
face value of the draft (Exhibit "A") plus $18.06 as 1/8 of 1% commission. After
the maturity date (October 4, 1949) Plaintiff-Appellant presented the draft to
Defendant-Appellee for payment but the latter failed, neglected and refused to pay.

During its special session in January, 1951, Congress passed House Bill No. 1513,
now Republic Act No. 601, approved on March 28, 1951, imposing a 17% special excise
tax (otherwise known as foreign exchange tax) on the value in Philippine peso of
foreign exchange sold by the Central Bank of the Philippines or its authorized
agents. Plaintiff-appellant, as any other commercial bank in the Philippines, is an
authorized agent of the Central Bank of the Philippines.

On October 17, 1952, and January 18, 1953, Plaintiff-Appellant sent bills or
statements of collection (Exhibits "D" and "D-1") to Defendant-Appellee but the
latter failed and refused to effect payment thereof. In those statements, the sum
of P4,955.74 was included representing the 17% special excise tax on the peso value
of the draft for US $14,449.15 (Exhibit "A"), . . . .
Defendant's application for a letter of credit party read as follows:

Please arrange by cable for the establishment of an Irrevocable Letter of Credit on


New York in favor of Otis Elevator Co., 260 Eleventh Avenue, New York City for
account of Ho. Jose C. Zulueta for the sum of FOURTEEN THOUSAND FOUR HUNDRED FORTY-
NINE AND 15/100 ($14,449.15) DOLLARS against drawn at NINETY DAYS accompanied by
shipping documents covering of One COMPLETE ELECTRIC PASSENGER ELEVATOR . . .

Drafts must be drawn and presented or negotiated not later than May 31, 1949.

IN CONSIDERATION THEREOF, I/we promise and agree to pay you at maturity in


Philippine Currency, the equivalent of the above amount or such portion thereof as
may be drawn or paid upon the faith of said credit, together with your usual
charges, and I/we authorize you and your respective correspondents to pay or to
accept drafts under this credit, . . .

And the draft issued thereunder (Exhibit A) was negotiable and addressed to herein
defendant as the drawee.

From plaintiff's statement of its position it is not clear whether recovery is


demanded upon the letter of credit, or upon the draft Exhibit A. Plaintiff may,
undoubtedly, proceed on either cause of action. (See Art. 571 Code of Commerce;
Sec. 51 Negotiable Instruments Law.)

Had the plaintiff elected to recover on said letter of credit, then it would meet
with the doctrines in Araneta vs. Philippine National Bank, 95 Phil., 160, 50 Off.
Gaz., (11) 5350), According to the majority opinion in that case, plaintiff should
receive the equivalent in pesos, on May 17, 1949, of what the New York Agency paid
to Otis Elevator, i.e. $14,467.21 (plus bank fees of course.) According to the
minority opinion, the equivalent in pesos of the same amount of dollars on October
4, 1949. No. 17% tax on both dates. In converting dollars into pesos, no 17%
exchange tax would be imposable, since it was created only in March 1951. The
plaintiff knows the case, for it was a party to it; and anticipating, in this
appeal, the obvious conclusions, it insists not so much on the letter of credit, as
on the bill of exchange Exhibit A1 . As stated before, such draft was drawn by Otis
Elevator Co. in New York. It was addressed to defendant as drawee, who is due
course accepted it. There is no, question that upon accepting it, defendant became
a party primarily liable2; and the holder (Philippine National Bank) may sue him,
even if there had been no presentation for payment on the day of maturity. (Sec. 70
Negotiable Instruments Law.)

Admittedly, defendant's responsibility is for $14,449.15 due in Manila on October


4, 1949 (plus bank fees). He is under obligation to deliver such amount in pesos as
were the equivalent of $14,449.15. At what rate of exchange? The rate prevailing on
the day of issuance, day of acceptance, day of maturity, the day suit is filed, or
that prevailing on the day judgment is rendered requiring him to pay? Herein lies
the center of the controversy. Appellant will win this appeal only if the rate on
the last days above mentioned is held to be the legal rate.

The document is negotiable and is governed by the Negotiable Instruments Law. But
this statute does not certain any express provision on the question. We know the
draft is a foreign bill of exchange, because, drawn in New York, it is payable
here. (See. 129 Negotiable Instruments Law.) We also know that although the amount
payable is expressed in dollars — not current money here — it is still negotiable,
for it may be discharged with pesos of equivalent amount3. The problem arises when
we try to determine the "equivalent amount", because the rate of exchange
fluctuates from day to day.

There are decisions in America to the effect that, "the rate of exchange in effect
at the time the bill should have been paid" controls. (11 C.J.S. p. 264.)

Such decisions agree with the provisions of the Bills of Exchange Act of England4
and could be taken as enunciating the correct principle, inasmuch as our Negotiable
Instruments Law, practically copied the American Uniform Negotiable Instruments Law
which in turn was based largely on the Bills of Exchange Act of England of 1882. In
fact we practically followed this rule in Westminster Bank vs. K. Nassor, 58 Phil.
855.

There is one decision applying the rate of exchange at the time judgment is
entered. (11 C. J. S. p.264.)5

This decision however seems not to have taken into account the Bills of Exchange
Act above mentioned. And we have rejected its view in the Westminster case, supra.
Furthermore it related to a bill expressly made payable in a foreign currency —
which is not the case here. And the theory would probably produce undesirable
effects upon commercial documents, for it would make the amount uncertain, the
parties to the bill not being able to foresee the day judgment would be rendered.6

But the appellant argues, the defendant had promised to pay $14,419.15 in dollars;
therefore he must be ordered to pay the sum in dollars at current rates plus 17%.

The argument rests on a wrong premise. Defendant had not promised to pay in
dollars. He agreed to pay the equivalent of $14,419.15 dollars, in Philippine
currency 7.

But if we admit that defendant had agreed to pay in dollars, then we have to apply
Republic Act No. 529 and say that his obligation "shall be discharged in Philippine
currency measured at the prevailing rates of exchange at the time the obligation
was incurred."

Now then, Zulueta's obligation having been incurred8 before the creation of the 17%
tax, it may not be validly burdened with such tax, because the law imposing it
could not be deemed to have impaired obligations already existing at the time of
its approval..

The plaintiff's theory seems to be that in remitting dollars to its New York
Agency, after it collects from the defendant, it has to pay for the said excise
tax.9 The trial judge expressed the belief that such amount had been remitted
before the enactment of Republic Act 601, because considering the practice of banks
of replenishing their agencies abroad with necessary funds, he deemed it improbable
that the Manila Office of the Bank — in two years had not reimburse its New York
Agency for the amount advanced on account of the draft Exhibit A. This belief most
probably accorded with reality; because as early as May 17, 1949 (Exhibit G) the
New York Agency had "charged" the amount of this draft against the account of the
Manila office there, — which means the Agency had reimbursed itself the amount of
the draft out of the funds of the Manila Office then in its possession (in New
York) or coming to its possession afterwards. And it is unbelievable that in two
years the Manila office never had in New York sufficient funds to effect the
reimbursement.

In fact, the statement of account rendered by plaintiff to defendant on October 17,


1952, (Exhibit D) enumerated these charges:

To your acceptance amounting to

$14,449.15

Plus: Remitter's Commission


18.06

$14,567.21

Converted at 3/4 %

P29,151.43

5% int. 5/17/49-10/19/52-1251 da.

4,995.68

P34,147.11

10% comm. on $14,449.15

2,911.51

Documentary stamps

8.70

Air Mail

2.00

17% Excise Tax on P29,151.43

4,955.74

Other charges

3.00

From the above it may be deduced that the amount of the draft had been remitted or
paid to the New York Agency in May 1949, for the reason that Zulueta is charged
with remitter's commission" and 5% interest on the amount of the draft (and such
commission) beginning from May 17, 1949. This necessarily impllies that in
accordance with Exhibit G, the New York Agency had been reimbursed of the draft's
amount (or such amount was remitted) on May 17, 1949.10 Now, in May 1949 no 17%
exchange tax was payable upon such remittance; and the Manila office did not pay
it. Therefore Zulueta should not pay it too.

In view of the foregoing the judgment will be affirmed, with costs against
appellant. So ordered.

Paras, C.J., Padilla, Montemayor and Bautista Angelo, JJ., concur.

Separate Opinions

REYES, A., J., concurring:

Plaintiff in this case seeks reimbursement in Philippine currency for the amount in
dollars advanced by it through its New York agency to meet a draft drawn against
defendant and accepted by the latter for a valuable consideration. Plaintiff's to
such reimbursement is not questioned. What is disputed is its pretended right to
add to the amount of the draft the excise tax of 17 % which plaintiff would had to
pay to the Government if it were to remit now to New York the necessary amount of
dollars that its agency there had paid on the draft.

I cannot bring myself to believe that it is only now that plaintiff has thought of
sending dollars to New York to replace the amount advanced by its agency. As
intimated in the majority opinion and in consonance with good banking practice, the
necessary remittance must have been effected long ago, that is, long before the
creation of the excise tax on foreign exchange in March, 1951. Plaintiff,
therefore, could not have paid such tax, and not having done so it has no right to
get reimbursement therefore from defendant.

I do not think that defendant could be legally made to pay more than what plaintiff
had actually advanced for him, aside from commission and other charges, on the
theory that the Philippine peso has depreciated in value with respect to the
American dollar. Legally, it has not. The legal rate of exchange between the two
currencies is still two to one. What happened is that with the creation of the
excise tax in 1951, it would now be more costly to remit dollars abroad. But why
should plaintiff make that remittance now when, as already stated, it must have
already done so long before the creation of the excise tax on foreign exchange?

Lastly, a debtor cannot be charged with bad faith for refusing to pay that which he
should not pay.

FELIX, J., concurring:

The decision rendered in this case, penned by Mr. Justice Cezar Bengzon, perfectly
reflects and delivers the opinion of the majority of this Court and I subscribe to
each and every statement made and argument adduced therein. This being so, it would
seem that any concurring or supporting opinion is quite superfluous and I would not
have taken the task of writing further in the matter were it not for the fact that
in the dissenting opinion it is stated that:

It cannot be justly contended that if a debtor had borrowed, say $10,000, the
lender should be satisfied with eight or nine thousand. Yet that is what the
majority's decision actually amounts to.

The writer further says that:

the majority opinion has the merit of giving the bank a costly lesson on the
advantages of not considering political influence in the making and collecting of
its loans; but I am afraid the experience will be too quickly forgotten to even
palliate the sacrifice of fundamental justice to technical considerations.

I, certainly, cannot leave these statements pass unanswered.

To begin with, I might say that if any lesson has been given by the majority of
this court to the plaintiff bank, it is not in this case but in the case of Araneta
vs. The Philippine National Bank (G.R. No. L-4633, May 31, 1954), cited in the
majority decision, where the latter was a party to that case and a similar doctrine
was laid down. Coming now to the bone of contention, I notice that the dissenting
Justice views the matter involved in the controversy as a loan and submits that the
question really at issue can be boiled down to the proposition of "whether it is
the lender or the borrower who should bear the added cost of the depreciation of
the peso in relation to the dollar".

In this connection, I might say that defendant's obligation to the plaintiff would
have been settled some years ago were it not for the fact that the Bank insisted in
collecting the special excise tax of 17 per cent on foreign exchange transactions
imposed by Republic Act No. 601 which entered into effect on March 28, 1951, and
was not yet in force at the time the obligation of the defendant matured on October
4, 1948. And even if we look at the case as a loan and apply to the transaction the
provisions of Article 312, paragraph 1, of the Code of Commerce, cited by the
dissenting Justice, yet We could not, under the facts and circumstances of the case
that cannot be denied, logically arrive at the same conclusion that he has come to.

And the reason is obvious. In the first place, We have to take into account that
the New York agency of Philippine National Bank and its central office in Manila
are not separate and independent entities. That is why it is the Philippine
National Bank (Manila office) and not the New York agency of said Bank that is the
plaintiff in this case. Consequently, any payment made to plaintiffs central office
in Manila for obligations that any debtor may have contracted with said New York
agency is and has to be considered as a payment or settlement of said obligations,
there being no need to attain this result that the plaintiff would adjust is
accounts with its agency, or transmit to the latter the amounts received from the
debtor.

In the second place, the obligation contracted by the defendant was not to pay
$14,419.15 in dollars, but the equivalent of $14,419.15 dollars, in Philippine
currency. So, when defendant's obligation matured on October 4, 1949, the defendant
had to pay to the Bank not the sum of $14,467.21 representing the face value of the
draft Exhibit A, plus $18.06 as 1/8 of 1 per cent commission, but its equivalent in
pesos at the time of such maturity, and had the defendant failed to satisfy then
his obligation, he could be held liable to pay in addition thereof, the
corresponding interests for the period of default and nothing else. And that is
precisely what defendant is willing to pay.

From the foregoing, I hope to have made clear my stand on the matter.

REYES, J.B.L., dissenting:

As I view it, the question before this court is whether it is the lender or the
defaulting borrower who should bear the added cost of the depreciation of the peso
in relation to the dollar.

When in 1949 the Philippine National Bank remitted to the Otis Elevator Co. the
$14,449.15 for the account of Zulueta, the Bank, in effect, loaned to Zulueta said
amount on the strength of his express engagement to "pay at maturity in Philippine
Currency, the equivalent of the above amount," which was a promise to pay such
amount in Philippine pesos as could be converted into $14,449.15. There is no
question that Zulueta failed to do so, and has refused to do so up to the present.
In the meantime, in 1951, the Legislature enacted Rep. Act No. 601, imposing a 17%
special excise tax on foreign exchange transactions, so that thereafter one had to
pay 234 pesos for every $100, instead of P200 as heretofore. Should Zulueta be
required to pay for the dollars at the new rate?

Since Zulueta's obligation is measured in terms of U.S. dollars that have increased
in value vis-a-vis the peso, Art. 312, par. 1, of the Code of Commerce, which was
the law then in force, must be read into the contract. It provides:

If the loan consists of money, the debtor shall pay it by returning an amount equal
to that received, in accordance with the legal value which the money may have at
the time of the return, unless the kind of money in which the payment is to be made
has been stipulated, in which case the change which its value may suffer shall be
to the detriment or for the benefit of the lender. (Emphasis supplied)

The majority decision, in upholding the contention that Zulueta is not chargeable
with the 17% tax, virtually authorizes just the contrary; and permits the
defaulting borrower to repay an amount in pesos that, in violation of the law and
his engagement, can not be converted into the same amount of dollars loaned to him.
I believe it is contrary to all elemental justice and good faith to enable a
borrower to return to his creditor less than the amount borrowed, specially taking
into account that Zulueta, by his obdurate refusal to pay a just debt, is a debtor
in bad faith who is responsible for any subsequent damages suffered by his
creditor, even if due to fortuitous event.

Applicable here are the considerations in Hawes vs. Woolcock (26 Wis. 629, 635),
quoted with approval in Engel vs. Mariano Velasco & Co., 47 Phil. 115, 143:

In Hawes vs. Woolcock (26 Wis., 629, 635), the court said:

"Perhaps a strict application of logical reasoning to the question would lead to


the result that the premium should be estimated at the rate when the note fell due.
That was when the money should have been paid, and when the default in performing
the contract occurred. This conclusion would be supported by the analogy derived
from the rule of damages on contracts to deliver specific articles, fixing the
market price at the time when they ought to have been delivered as the criterion.
This rule might sometimes be to the advantage of the holder of the note, as in the
present case. In other cases, where the premium was less at the time the note
became due than at the time of trial, it would be to his detriment. And in view of
these uncertainties and fluctuations in the rate, upon grounds of policy as well as
for its tendency to do as complete justice between the parties as is possible, we
have come to the conclusion that the true rule in such cases is to give judgment
for such an amount as will, at the time of the judgment, purchase the amount due on
the note in the funds or currency in which it is payable.

The crucial point is that the Bank's action is not for damages, but for specific
performance of Zulueta's obligation. While payable in Philippine pesos, it was
actually one to pay a definite sum in United States dollars, since he promised to
pay an equivalent amount. The failure to specify any fixed number of pesos, and the
omission of any reference to any rate of exchange, is proof that the parties had in
mind the restoration to the Bank of the value of the dollars it had advanced. In
other words, Zulueta engaged to return to the Bank so many Philippine pesos as
could be converted into $14,449.15; and that is what the Bank asks him to do. It
can not be justly contended that if a debtor had borrowed, say, ten thousand
dollars, the lender should be satisfied with eight or nine thousand. Yet that is
what the majority's decision actually amounts to.

I see no point in determining the rate of dollar-peso exchange at the date of


maturity or of the constitution of the obligation, since Zulueta did not engage to
pay any definite amount of pesos, but so many as would be needed to make up
$14,449.15. And as Zulueta is being required to comply with a specific promise,
there is no relevancy in whether or not the main office of the Bank has or has not
remitted the dollars to its American agency; after all, the two part are of the
same institution. Anyway, if the dollars have not been remitted, the amount that
Zulueta is now sentenced to pay will not permit a remittance of the same number of
dollars that the Bank advanced for his account. If they were heretofore remitted,
the funds of the Bank in Manila have been diminished pro tanto, and they can not be
replenished to their original level in terms of dollars unless Zulueta is required
to pay the exchange tax.

Of course, the majority opinion has the merit of giving the Bank a costly lesson on
the advantages of not considering political influence in the making and collecting
of its loans; but I am afraid the experience will be too quickly forgotten to even
palliate the sacrifice of fundamental justice to technical considerations.
For the foregoing reasons, I dissent.

Labrador, Concepcion and Endencia, JJ., concur.

Footnotes

1 Yet it is charging defendant interest on the amount beginning from May 17, 1949
i.e., from the time the New York Agency advanced money on the draft. If recovery
were based on the draft, interest should run only from the day following its
maturity i. e. on October 5, 1949.

2 Sec. 62 Negotiable Instruments Law. Union Guarantee vs. Jing Kee, 44 Phil. 533.

3 Hogue vs. Williamson, 22 S.W. Rep p. 580.

4 72. Rules Where Laws Conflict. ... (4) Where a bill is drawn out but payable in
the United Kingdom and the sum payable is not expressed in the currency of the
United Kingdom the amount shall, in the absence of some express stipulation, be
calculated according to the rate of exchange for sight drafts at the place of
payment on the day the bill is payable.

5 Liberty National Bank vs. Burr, 270 Fed. 251.

6 Amount payable on negotiable instrument should be certain or ascertainable.

7 See hogue vs. Williamson, supra.

8 "Incurred" may mean either the day he accepted the draft or the day such draft
matured; we need not decide. Certainly it does not mean the day of judgment.

9 If, as we assume in this part of the decision, the suit is on the draft, the
drawee has nothing to do with such remission to New York. His duty is only to pay
the holder. What the latter does with the money, is none of his business. Now, if
plaintiff should point to the letter of credit which gave rise to the draft, then
it will be bound by our views in the Araneta case, supra.

10 Interest on the cost of remission may be collected only after the Manila Office
had remitted.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-7271 August 30, 1957

PHILIPPINE NATIONAL BANK, plaintiff-appellant,


vs.
JOSE ZULUETA, defendant-appellee.
Natalio M. Balboa and Ramon B. de los Reyes for appellant.
Lorenzo F. Miravite for appellee.

BENGZON, J.:

In the Manila court of first instance, the Philippine National Bank sued the
defendant upon a letter of credit and a draft for the amount of $14,449.15.
Although willing to pay the equivalent in pesos of the draft, plus bank charges,
the defendant objected to the 17% excise tax imposed by Republic Act No. 601 which
the Bank tried to collect. Both documents, he contended, had been issued and had
matured before the approval of said Act, therefore the excise tax should not be
charged.

After the trial, the court rendered judgment exempting defendant from the 17%
excise tax; but ordered him to deliver to plaintiff the sum of P37,622.11 plus
daily interest of P3.9938 on P29,154.55 beginning from January 9, 1953.

The plaintiff appealed, insisting on the right to collect 17% excise or exchange
tax. This is the only issue between the parties now.

For a statement of the facts we may quote from plaintiff's brief. "On October 26,
1948, Defendant-Appellee applied for a commercial letter of credit with Plaintiff-
Appellant, Philippine National Bank (Manila) and was granted L/C No. 35171 (Exhibit
"B") on November 6, 1948, in favor of Otis Elevator Co., 260 Eleventh Avenue, New
York City, U.S.A., for $14,449.15 for the purchase of an electric passenger
elevator; on May 17, 1949, and under the said letter of credit (Exhibit "B"), Otis
Elevator Co. drew a 90 day sight draft for $14,449.15 (Exhibit "A") which draft was
duly presented to and accepted by Defendant-Appellee on July 6, 1949. Said
acceptance matured on October 4, 1949. Upon Defendant-Appellee's signing a 90 day
trust receipt (Exhibit "C") on June 3, 1949, Plaintiff-Appellant released to
Defendant-Appellee the covering documents of the shipment. In the meantime, debit
advice (Exhibit "G") was received from Plaintiff-Appellant's New York Agency to the
effect that it advanced or paid the draft (Exhibit "A") to Otis Elevator Co. on May
17, 1949, and charged Plaintiff-Appellant the sum of $14,467.21 representing the
face value of the draft (Exhibit "A") plus $18.06 as 1/8 of 1% commission. After
the maturity date (October 4, 1949) Plaintiff-Appellant presented the draft to
Defendant-Appellee for payment but the latter failed, neglected and refused to pay.

During its special session in January, 1951, Congress passed House Bill No. 1513,
now Republic Act No. 601, approved on March 28, 1951, imposing a 17% special excise
tax (otherwise known as foreign exchange tax) on the value in Philippine peso of
foreign exchange sold by the Central Bank of the Philippines or its authorized
agents. Plaintiff-appellant, as any other commercial bank in the Philippines, is an
authorized agent of the Central Bank of the Philippines.

On October 17, 1952, and January 18, 1953, Plaintiff-Appellant sent bills or
statements of collection (Exhibits "D" and "D-1") to Defendant-Appellee but the
latter failed and refused to effect payment thereof. In those statements, the sum
of P4,955.74 was included representing the 17% special excise tax on the peso value
of the draft for US $14,449.15 (Exhibit "A"), . . . .

Defendant's application for a letter of credit party read as follows:

Please arrange by cable for the establishment of an Irrevocable Letter of Credit on


New York in favor of Otis Elevator Co., 260 Eleventh Avenue, New York City for
account of Ho. Jose C. Zulueta for the sum of FOURTEEN THOUSAND FOUR HUNDRED FORTY-
NINE AND 15/100 ($14,449.15) DOLLARS against drawn at NINETY DAYS accompanied by
shipping documents covering of One COMPLETE ELECTRIC PASSENGER ELEVATOR . . .
Drafts must be drawn and presented or negotiated not later than May 31, 1949.

IN CONSIDERATION THEREOF, I/we promise and agree to pay you at maturity in


Philippine Currency, the equivalent of the above amount or such portion thereof as
may be drawn or paid upon the faith of said credit, together with your usual
charges, and I/we authorize you and your respective correspondents to pay or to
accept drafts under this credit, . . .

And the draft issued thereunder (Exhibit A) was negotiable and addressed to herein
defendant as the drawee.

From plaintiff's statement of its position it is not clear whether recovery is


demanded upon the letter of credit, or upon the draft Exhibit A. Plaintiff may,
undoubtedly, proceed on either cause of action. (See Art. 571 Code of Commerce;
Sec. 51 Negotiable Instruments Law.)

Had the plaintiff elected to recover on said letter of credit, then it would meet
with the doctrines in Araneta vs. Philippine National Bank, 95 Phil., 160, 50 Off.
Gaz., (11) 5350), According to the majority opinion in that case, plaintiff should
receive the equivalent in pesos, on May 17, 1949, of what the New York Agency paid
to Otis Elevator, i.e. $14,467.21 (plus bank fees of course.) According to the
minority opinion, the equivalent in pesos of the same amount of dollars on October
4, 1949. No. 17% tax on both dates. In converting dollars into pesos, no 17%
exchange tax would be imposable, since it was created only in March 1951. The
plaintiff knows the case, for it was a party to it; and anticipating, in this
appeal, the obvious conclusions, it insists not so much on the letter of credit, as
on the bill of exchange Exhibit A1 . As stated before, such draft was drawn by Otis
Elevator Co. in New York. It was addressed to defendant as drawee, who is due
course accepted it. There is no, question that upon accepting it, defendant became
a party primarily liable2; and the holder (Philippine National Bank) may sue him,
even if there had been no presentation for payment on the day of maturity. (Sec. 70
Negotiable Instruments Law.)

Admittedly, defendant's responsibility is for $14,449.15 due in Manila on October


4, 1949 (plus bank fees). He is under obligation to deliver such amount in pesos as
were the equivalent of $14,449.15. At what rate of exchange? The rate prevailing on
the day of issuance, day of acceptance, day of maturity, the day suit is filed, or
that prevailing on the day judgment is rendered requiring him to pay? Herein lies
the center of the controversy. Appellant will win this appeal only if the rate on
the last days above mentioned is held to be the legal rate.

The document is negotiable and is governed by the Negotiable Instruments Law. But
this statute does not certain any express provision on the question. We know the
draft is a foreign bill of exchange, because, drawn in New York, it is payable
here. (See. 129 Negotiable Instruments Law.) We also know that although the amount
payable is expressed in dollars — not current money here — it is still negotiable,
for it may be discharged with pesos of equivalent amount3. The problem arises when
we try to determine the "equivalent amount", because the rate of exchange
fluctuates from day to day.

There are decisions in America to the effect that, "the rate of exchange in effect
at the time the bill should have been paid" controls. (11 C.J.S. p. 264.)

Such decisions agree with the provisions of the Bills of Exchange Act of England4
and could be taken as enunciating the correct principle, inasmuch as our Negotiable
Instruments Law, practically copied the American Uniform Negotiable Instruments Law
which in turn was based largely on the Bills of Exchange Act of England of 1882. In
fact we practically followed this rule in Westminster Bank vs. K. Nassor, 58 Phil.
855.
There is one decision applying the rate of exchange at the time judgment is
entered. (11 C. J. S. p.264.)5

This decision however seems not to have taken into account the Bills of Exchange
Act above mentioned. And we have rejected its view in the Westminster case, supra.
Furthermore it related to a bill expressly made payable in a foreign currency —
which is not the case here. And the theory would probably produce undesirable
effects upon commercial documents, for it would make the amount uncertain, the
parties to the bill not being able to foresee the day judgment would be rendered.6

But the appellant argues, the defendant had promised to pay $14,419.15 in dollars;
therefore he must be ordered to pay the sum in dollars at current rates plus 17%.

The argument rests on a wrong premise. Defendant had not promised to pay in
dollars. He agreed to pay the equivalent of $14,419.15 dollars, in Philippine
currency 7.

But if we admit that defendant had agreed to pay in dollars, then we have to apply
Republic Act No. 529 and say that his obligation "shall be discharged in Philippine
currency measured at the prevailing rates of exchange at the time the obligation
was incurred."

Now then, Zulueta's obligation having been incurred8 before the creation of the 17%
tax, it may not be validly burdened with such tax, because the law imposing it
could not be deemed to have impaired obligations already existing at the time of
its approval..

The plaintiff's theory seems to be that in remitting dollars to its New York
Agency, after it collects from the defendant, it has to pay for the said excise
tax.9 The trial judge expressed the belief that such amount had been remitted
before the enactment of Republic Act 601, because considering the practice of banks
of replenishing their agencies abroad with necessary funds, he deemed it improbable
that the Manila Office of the Bank — in two years had not reimburse its New York
Agency for the amount advanced on account of the draft Exhibit A. This belief most
probably accorded with reality; because as early as May 17, 1949 (Exhibit G) the
New York Agency had "charged" the amount of this draft against the account of the
Manila office there, — which means the Agency had reimbursed itself the amount of
the draft out of the funds of the Manila Office then in its possession (in New
York) or coming to its possession afterwards. And it is unbelievable that in two
years the Manila office never had in New York sufficient funds to effect the
reimbursement.

In fact, the statement of account rendered by plaintiff to defendant on October 17,


1952, (Exhibit D) enumerated these charges:

To your acceptance amounting to

$14,449.15

Plus: Remitter's Commission

18.06

$14,567.21

Converted at 3/4 %

P29,151.43
5% int. 5/17/49-10/19/52-1251 da.

4,995.68

P34,147.11

10% comm. on $14,449.15

2,911.51

Documentary stamps

8.70

Air Mail

2.00

17% Excise Tax on P29,151.43

4,955.74

Other charges

3.00

From the above it may be deduced that the amount of the draft had been remitted or
paid to the New York Agency in May 1949, for the reason that Zulueta is charged
with remitter's commission" and 5% interest on the amount of the draft (and such
commission) beginning from May 17, 1949. This necessarily impllies that in
accordance with Exhibit G, the New York Agency had been reimbursed of the draft's
amount (or such amount was remitted) on May 17, 1949.10 Now, in May 1949 no 17%
exchange tax was payable upon such remittance; and the Manila office did not pay
it. Therefore Zulueta should not pay it too.

In view of the foregoing the judgment will be affirmed, with costs against
appellant. So ordered.

Paras, C.J., Padilla, Montemayor and Bautista Angelo, JJ., concur.

Separate Opinions

REYES, A., J., concurring:

Plaintiff in this case seeks reimbursement in Philippine currency for the amount in
dollars advanced by it through its New York agency to meet a draft drawn against
defendant and accepted by the latter for a valuable consideration. Plaintiff's to
such reimbursement is not questioned. What is disputed is its pretended right to
add to the amount of the draft the excise tax of 17 % which plaintiff would had to
pay to the Government if it were to remit now to New York the necessary amount of
dollars that its agency there had paid on the draft.

I cannot bring myself to believe that it is only now that plaintiff has thought of
sending dollars to New York to replace the amount advanced by its agency. As
intimated in the majority opinion and in consonance with good banking practice, the
necessary remittance must have been effected long ago, that is, long before the
creation of the excise tax on foreign exchange in March, 1951. Plaintiff,
therefore, could not have paid such tax, and not having done so it has no right to
get reimbursement therefore from defendant.

I do not think that defendant could be legally made to pay more than what plaintiff
had actually advanced for him, aside from commission and other charges, on the
theory that the Philippine peso has depreciated in value with respect to the
American dollar. Legally, it has not. The legal rate of exchange between the two
currencies is still two to one. What happened is that with the creation of the
excise tax in 1951, it would now be more costly to remit dollars abroad. But why
should plaintiff make that remittance now when, as already stated, it must have
already done so long before the creation of the excise tax on foreign exchange?

Lastly, a debtor cannot be charged with bad faith for refusing to pay that which he
should not pay.

FELIX, J., concurring:

The decision rendered in this case, penned by Mr. Justice Cezar Bengzon, perfectly
reflects and delivers the opinion of the majority of this Court and I subscribe to
each and every statement made and argument adduced therein. This being so, it would
seem that any concurring or supporting opinion is quite superfluous and I would not
have taken the task of writing further in the matter were it not for the fact that
in the dissenting opinion it is stated that:

It cannot be justly contended that if a debtor had borrowed, say $10,000, the
lender should be satisfied with eight or nine thousand. Yet that is what the
majority's decision actually amounts to.

The writer further says that:

the majority opinion has the merit of giving the bank a costly lesson on the
advantages of not considering political influence in the making and collecting of
its loans; but I am afraid the experience will be too quickly forgotten to even
palliate the sacrifice of fundamental justice to technical considerations.

I, certainly, cannot leave these statements pass unanswered.

To begin with, I might say that if any lesson has been given by the majority of
this court to the plaintiff bank, it is not in this case but in the case of Araneta
vs. The Philippine National Bank (G.R. No. L-4633, May 31, 1954), cited in the
majority decision, where the latter was a party to that case and a similar doctrine
was laid down. Coming now to the bone of contention, I notice that the dissenting
Justice views the matter involved in the controversy as a loan and submits that the
question really at issue can be boiled down to the proposition of "whether it is
the lender or the borrower who should bear the added cost of the depreciation of
the peso in relation to the dollar".

In this connection, I might say that defendant's obligation to the plaintiff would
have been settled some years ago were it not for the fact that the Bank insisted in
collecting the special excise tax of 17 per cent on foreign exchange transactions
imposed by Republic Act No. 601 which entered into effect on March 28, 1951, and
was not yet in force at the time the obligation of the defendant matured on October
4, 1948. And even if we look at the case as a loan and apply to the transaction the
provisions of Article 312, paragraph 1, of the Code of Commerce, cited by the
dissenting Justice, yet We could not, under the facts and circumstances of the case
that cannot be denied, logically arrive at the same conclusion that he has come to.

And the reason is obvious. In the first place, We have to take into account that
the New York agency of Philippine National Bank and its central office in Manila
are not separate and independent entities. That is why it is the Philippine
National Bank (Manila office) and not the New York agency of said Bank that is the
plaintiff in this case. Consequently, any payment made to plaintiffs central office
in Manila for obligations that any debtor may have contracted with said New York
agency is and has to be considered as a payment or settlement of said obligations,
there being no need to attain this result that the plaintiff would adjust is
accounts with its agency, or transmit to the latter the amounts received from the
debtor.

In the second place, the obligation contracted by the defendant was not to pay
$14,419.15 in dollars, but the equivalent of $14,419.15 dollars, in Philippine
currency. So, when defendant's obligation matured on October 4, 1949, the defendant
had to pay to the Bank not the sum of $14,467.21 representing the face value of the
draft Exhibit A, plus $18.06 as 1/8 of 1 per cent commission, but its equivalent in
pesos at the time of such maturity, and had the defendant failed to satisfy then
his obligation, he could be held liable to pay in addition thereof, the
corresponding interests for the period of default and nothing else. And that is
precisely what defendant is willing to pay.

From the foregoing, I hope to have made clear my stand on the matter.

REYES, J.B.L., dissenting:

As I view it, the question before this court is whether it is the lender or the
defaulting borrower who should bear the added cost of the depreciation of the peso
in relation to the dollar.

When in 1949 the Philippine National Bank remitted to the Otis Elevator Co. the
$14,449.15 for the account of Zulueta, the Bank, in effect, loaned to Zulueta said
amount on the strength of his express engagement to "pay at maturity in Philippine
Currency, the equivalent of the above amount," which was a promise to pay such
amount in Philippine pesos as could be converted into $14,449.15. There is no
question that Zulueta failed to do so, and has refused to do so up to the present.
In the meantime, in 1951, the Legislature enacted Rep. Act No. 601, imposing a 17%
special excise tax on foreign exchange transactions, so that thereafter one had to
pay 234 pesos for every $100, instead of P200 as heretofore. Should Zulueta be
required to pay for the dollars at the new rate?

Since Zulueta's obligation is measured in terms of U.S. dollars that have increased
in value vis-a-vis the peso, Art. 312, par. 1, of the Code of Commerce, which was
the law then in force, must be read into the contract. It provides:

If the loan consists of money, the debtor shall pay it by returning an amount equal
to that received, in accordance with the legal value which the money may have at
the time of the return, unless the kind of money in which the payment is to be made
has been stipulated, in which case the change which its value may suffer shall be
to the detriment or for the benefit of the lender. (Emphasis supplied)

The majority decision, in upholding the contention that Zulueta is not chargeable
with the 17% tax, virtually authorizes just the contrary; and permits the
defaulting borrower to repay an amount in pesos that, in violation of the law and
his engagement, can not be converted into the same amount of dollars loaned to him.
I believe it is contrary to all elemental justice and good faith to enable a
borrower to return to his creditor less than the amount borrowed, specially taking
into account that Zulueta, by his obdurate refusal to pay a just debt, is a debtor
in bad faith who is responsible for any subsequent damages suffered by his
creditor, even if due to fortuitous event.
Applicable here are the considerations in Hawes vs. Woolcock (26 Wis. 629, 635),
quoted with approval in Engel vs. Mariano Velasco & Co., 47 Phil. 115, 143:

In Hawes vs. Woolcock (26 Wis., 629, 635), the court said:

"Perhaps a strict application of logical reasoning to the question would lead to


the result that the premium should be estimated at the rate when the note fell due.
That was when the money should have been paid, and when the default in performing
the contract occurred. This conclusion would be supported by the analogy derived
from the rule of damages on contracts to deliver specific articles, fixing the
market price at the time when they ought to have been delivered as the criterion.
This rule might sometimes be to the advantage of the holder of the note, as in the
present case. In other cases, where the premium was less at the time the note
became due than at the time of trial, it would be to his detriment. And in view of
these uncertainties and fluctuations in the rate, upon grounds of policy as well as
for its tendency to do as complete justice between the parties as is possible, we
have come to the conclusion that the true rule in such cases is to give judgment
for such an amount as will, at the time of the judgment, purchase the amount due on
the note in the funds or currency in which it is payable.

The crucial point is that the Bank's action is not for damages, but for specific
performance of Zulueta's obligation. While payable in Philippine pesos, it was
actually one to pay a definite sum in United States dollars, since he promised to
pay an equivalent amount. The failure to specify any fixed number of pesos, and the
omission of any reference to any rate of exchange, is proof that the parties had in
mind the restoration to the Bank of the value of the dollars it had advanced. In
other words, Zulueta engaged to return to the Bank so many Philippine pesos as
could be converted into $14,449.15; and that is what the Bank asks him to do. It
can not be justly contended that if a debtor had borrowed, say, ten thousand
dollars, the lender should be satisfied with eight or nine thousand. Yet that is
what the majority's decision actually amounts to.

I see no point in determining the rate of dollar-peso exchange at the date of


maturity or of the constitution of the obligation, since Zulueta did not engage to
pay any definite amount of pesos, but so many as would be needed to make up
$14,449.15. And as Zulueta is being required to comply with a specific promise,
there is no relevancy in whether or not the main office of the Bank has or has not
remitted the dollars to its American agency; after all, the two part are of the
same institution. Anyway, if the dollars have not been remitted, the amount that
Zulueta is now sentenced to pay will not permit a remittance of the same number of
dollars that the Bank advanced for his account. If they were heretofore remitted,
the funds of the Bank in Manila have been diminished pro tanto, and they can not be
replenished to their original level in terms of dollars unless Zulueta is required
to pay the exchange tax.

Of course, the majority opinion has the merit of giving the Bank a costly lesson on
the advantages of not considering political influence in the making and collecting
of its loans; but I am afraid the experience will be too quickly forgotten to even
palliate the sacrifice of fundamental justice to technical considerations.

For the foregoing reasons, I dissent.

Labrador, Concepcion and Endencia, JJ., concur.

Footnotes

1 Yet it is charging defendant interest on the amount beginning from May 17, 1949
i.e., from the time the New York Agency advanced money on the draft. If recovery
were based on the draft, interest should run only from the day following its
maturity i. e. on October 5, 1949.

2 Sec. 62 Negotiable Instruments Law. Union Guarantee vs. Jing Kee, 44 Phil. 533.

3 Hogue vs. Williamson, 22 S.W. Rep p. 580.

4 72. Rules Where Laws Conflict. ... (4) Where a bill is drawn out but payable in
the United Kingdom and the sum payable is not expressed in the currency of the
United Kingdom the amount shall, in the absence of some express stipulation, be
calculated according to the rate of exchange for sight drafts at the place of
payment on the day the bill is payable.

5 Liberty National Bank vs. Burr, 270 Fed. 251.

6 Amount payable on negotiable instrument should be certain or ascertainable.

7 See hogue vs. Williamson, supra.

8 "Incurred" may mean either the day he accepted the draft or the day such draft
matured; we need not decide. Certainly it does not mean the day of judgment.

9 If, as we assume in this part of the decision, the suit is on the draft, the
drawee has nothing to do with such remission to New York. His duty is only to pay
the holder. What the latter does with the money, is none of his business. Now, if
plaintiff should point to the letter of credit which gave rise to the draft, then
it will be bound by our views in the Araneta case, supra.

10 Interest on the cost of remission may be collected only after the Manila Office
had remitted.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T. VERGARA,


petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.

Carpio, Villaraza & Cruz Law Offices for petitioners.

Europa, Dacanay & Tolentino for respondent.

GUTIERREZ, JR., J.:


This is a petition for certiorari under Rule 45 of the Rules of Court which assails
on questions of law a decision of the Intermediate Appellate Court in AC-G.R. CV
No. 68609 dated July 17, 1985, as well as its resolution dated October 17, 1985,
denying the motion for reconsideration.

The antecedent facts culled from the petition are as follows:

The petitioner is a corporation engaged in the logging business. It had for its
program of logging activities for the year 1978 the opening of additional roads,
and simultaneous logging operations along the route of said roads, in its logging
concession area at Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it
needed two (2) additional units of tractors.

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific


Company of Manila, through its sister company and marketing arm, Industrial
Products Marketing (the "seller-assignor"), a corporation dealing in tractors and
other heavy equipment business, offered to sell to petitioner-corporation two (2)
"Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B.

In order to ascertain the extent of work to which the tractors were to be exposed,
(t.s.n., May 28, 1980, p. 44) and to determine the capability of the "Used"
tractors being offered, petitioner-corporation requested the seller-assignor to
inspect the job site. After conducting said inspection, the seller-assignor assured
petitioner-corporation that the "Used" Allis Crawler Tractors which were being
offered were fit for the job, and gave the corresponding warranty of ninety (90)
days performance of the machines and availability of parts. (t.s.n., May 28, 1980,
pp. 59-66).

With said assurance and warranty, and relying on the seller-assignor's skill and
judgment, petitioner-corporation through petitioners Wee and Vergara, president and
vice- president, respectively, agreed to purchase on installment said two (2) units
of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten
Thousand Pesos (P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units
of tractors (Exh. "3-A"). At the same time, the deed of sale with chattel mortgage
with promissory note was executed (Exh. "2").

Simultaneously with the execution of the deed of sale with chattel mortgage with
promissory note, the seller-assignor, by means of a deed of assignment (E exh. " 1
"), assigned its rights and interest in the chattel mortgage in favor of the
respondent.

Immediately thereafter, the seller-assignor delivered said two (2) units of "Used"
tractors to the petitioner-corporation's job site and as agreed, the seller-
assignor stationed its own mechanics to supervise the operations of the machines.

Barely fourteen (14) days had elapsed after their delivery when one of the tractors
broke down and after another nine (9) days, the other tractor likewise broke down
(t.s.n., May 28, 1980, pp. 68-69).

On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-
assignor of the fact that the tractors broke down and requested for the seller-
assignor's usual prompt attention under the warranty (E exh. " 5 ").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the
seller-assignor sent to the job site its mechanics to conduct the necessary repairs
(Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did
not come out to be what they should be after the repairs were undertaken because
the units were no longer serviceable (t. s. n., May 28, 1980, p. 78).

Because of the breaking down of the tractors, the road building and simultaneous
logging operations of petitioner-corporation were delayed and petitioner Vergara
advised the seller-assignor that the payments of the installments as listed in the
promissory note would likewise be delayed until the seller-assignor completely
fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee
asked the seller-assignor to pull out the units and have them reconditioned, and
thereafter to offer them for sale. The proceeds were to be given to the respondent
and the excess, if any, to be divided between the seller-assignor and petitioner-
corporation which offered to bear one-half (1/2) of the reconditioning cost (E exh.
" 7 ").

No response to this letter, Exhibit "7," was received by the petitioner-corporation


and despite several follow-up calls, the seller-assignor did nothing with regard to
the request, until the complaint in this case was filed by the respondent against
the petitioners, the corporation, Wee, and Vergara.

The complaint was filed by the respondent against the petitioners for the recovery
of the principal sum of One Million Ninety Three Thousand Seven Hundred Eighty Nine
Pesos & 71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One Thousand
Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing
interest thereafter at the rate of twelve (12%) percent per annum, attorney's fees
of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and
costs of suit.

The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the petitioners
damages in an amount at the sound discretion of the court, Twenty Thousand Pesos
(P20,000.00) as and for attorney's fees, and Five Thousand Pesos (P5,000.00) for
expenses of litigation. The petitioners likewise prayed for such other and further
relief as would be just under the premises.

In a decision dated April 20, 1981, the trial court rendered the following
judgment:

WHEREFORE, judgment is hereby rendered:

1. ordering defendants to pay jointly and severally in their official and


personal capacities the principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN
HUNDRED NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of ONE
HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as of
August 15, 1979 and accruing interest thereafter at the rate of 12% per annum;

2. ordering defendants to pay jointly and severally attorney's fees equivalent


to ten percent (10%) of the principal and to pay the costs of the suit.

Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and assigned
therein the following errors:

I
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC
COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.

II

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN DUE
COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE
COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the challenged decision
affirming in toto the decision of the trial court. The pertinent portions of the
decision are as follows:

xxx xxx xxx

From the evidence presented by the parties on the issue of warranty, We are of the
considered opinion that aside from the fact that no provision of warranty appears
or is provided in the Deed of Sale of the tractors and even admitting that in a
contract of sale unless a contrary intention appears, there is an implied warranty,
the defense of breach of warranty, if there is any, as in this case, does not lie
in favor of the appellants and against the plaintiff-appellee who is the assignee
of the promissory note and a holder of the same in due course. Warranty lies in
this case only between Industrial Products Marketing and Consolidated Plywood
Industries, Inc. The plaintiff-appellant herein upon application by appellant
corporation granted financing for the purchase of the questioned units of Fiat-
Allis Crawler,Tractors.

xxx xxx xxx

Holding that breach of warranty if any, is not a defense available to appellants


either to withdraw from the contract and/or demand a proportionate reduction of the
price with damages in either case (Art. 1567, New Civil Code). We now come to the
issue as to whether the plaintiff-appellee is a holder in due course of the
promissory note.

To begin with, it is beyond arguments that the plaintiff-appellee is a financing


corporation engaged in financing and receivable discounting extending credit
facilities to consumers and industrial, commercial or agricultural enterprises by
discounting or factoring commercial papers or accounts receivable duly authorized
pursuant to R.A. 5980 otherwise known as the Financing Act.

A study of the questioned promissory note reveals that it is a negotiable


instrument which was discounted or sold to the IFC Leasing and Acceptance
Corporation for P800,000.00 (Exh. "A") considering the following. it is in writing
and signed by the maker; it contains an unconditional promise to pay a certain sum
of money payable at a fixed or determinable future time; it is payable to order
(Sec. 1, NIL); the promissory note was negotiated when it was transferred and
delivered by IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it
was taken in the conditions that the note was complete and regular upon its face
before the same was overdue and without notice, that it had been previously
dishonored and that the note is in good faith and for value without notice of any
infirmity or defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and
Acceptance Corporation held the instrument free from any defect of title of prior
parties and free from defenses available to prior parties among themselves and may
enforce payment of the instrument for the full amount thereof against all parties
liable thereon (Sec. 57, NIL); the appellants engaged that they would pay the note
according to its tenor, and admit the existence of the payee IPM and its capacity
to endorse (Sec. 60, NIL).
In view of the essential elements found in the questioned promissory note, We opine
that the same is legally and conclusively enforceable against the defendants-
appellants.

WHEREFORE, finding the decision appealed from according to law and evidence, We
find the appeal without merit and thus affirm the decision in toto. With costs
against the appellants. (pp. 50-55, Rollo)

The petitioners' motion for reconsideration of the decision of July 17, 1985 was
denied by the Intermediate Appellate Court in its resolution dated October 17,
1985, a copy of which was received by the petitioners on October 21, 1985.

Hence, this petition was filed on the following grounds:

I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED
UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.

II

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE
SUBJECT PROMISSORY NOTE.

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE TRANSFER OF
RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE
RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR,
INDUSTRIAL PRODUCTS MARKETING.

IV.

THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE
PROMISSORY NOTE.

V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.

VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT BECAUSE THE
REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED.

The petitioners prayed that judgment be rendered setting aside the decision dated
July 17, 1985, as well as the resolution dated October 17, 1985 and dismissing the
complaint but granting petitioners' counterclaims before the court of origin.

On the other hand, the respondent corporation in its comment to the petition filed
on February 20, 1986, contended that the petition was filed out of time; that the
promissory note is a negotiable instrument and respondent a holder in due course;
that respondent is not liable for any breach of warranty; and finally, that the
promissory note is admissible in evidence.

The core issue herein is whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the available defenses of the
petitioner against the respondent-assignee.

Preliminarily, it must be established at the outset that we consider the instant


petition to have been filed on time because the petitioners' motion for
reconsideration actually raised new issues. It cannot, therefore, be considered
pro- formal.

The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-day
warranty because the findings of the trial court, adopted by the respondent
appellate court, that "14 days after delivery, the first tractor broke down and 9
days, thereafter, the second tractor became inoperable" are sustained by the
records. The petitioner was clearly a victim of a warranty not honored by the
maker.

The Civil Code provides that:

ART. 1561. The vendor shall be responsible for warranty against the hidden defects
which the thing sold may have, should they render it unfit for the use for which it
is intended, or should they diminish its fitness for such use to such an extent
that, had the vendee been aware thereof, he would not have acquired it or would
have given a lower price for it; but said vendor shall not be answerable for patent
defects or those which may be visible, or for those which are not visible if the
vendee is an expert who, by reason of his trade or profession, should have known
them.

ART. 1562. In a sale of goods, there is an implied warranty or condition as to the


quality or fitness of the goods, as follows:

(1) Where the buyer, expressly or by implication makes known to the seller the
particular purpose for which the goods are acquired, and it appears that the buyer
relies on the sellers skill or judge judgment (whether he be the grower or
manufacturer or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;

xxx xxx xxx

ART. 1564. An implied warranty or condition as to the quality or fitness for a


particular purpose may be annexed by the usage of trade.

xxx xxx xxx

ART. 1566. The vendor is responsible to the vendee for any hidden faults or
defects in the thing sold even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor
was not aware of the hidden faults or defects in the thing sold. (Emphasis
supplied).

It is patent then, that the seller-assignor is liable for its breach of warranty
against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the assignee is a
holder in due course of the promissory note in question, assuming the note is
negotiable, in which case the latter's rights are based on the negotiable
instrument and assuming further that the petitioner's defenses may not prevail
against it.

Secondly, it likewise cannot be denied that as soon as the tractors broke down, the
petitioner-corporation notified the seller-assignor's sister company, AG & P, about
the breakdown based on the seller-assignor's express 90-day warranty, with which
the latter complied by sending its mechanics. However, due to the seller-assignor's
delay and its failure to comply with its warranty, the tractors became totally
unserviceable and useless for the purpose for which they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its


contract with the seller-assignor.

Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.

xxx xxx xxx

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee
may elect between withdrawing from the contract and demanding a proportionate
reduction of the price, with damages in either case. (Emphasis supplied)

Petitioner, having unilaterally and extrajudicially rescinded its contract with the
seller-assignor, necessarily can no longer sue the seller-assignor except by way of
counterclaim if the seller-assignor sues it because of the rescission.

In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we
held:

In other words, the party who deems the contract violated may consider it resolved
or rescinded, and act accordingly, without previous court action, but it proceeds
at its own risk. For it is only the final judgment of the corresponding court that
will conclusively and finally settle whether the action taken was or was not
correct in law. But the law definitely does not require that the contracting party
who believes itself injured must first file suit and wait for adjudgement before
taking extrajudicial steps to protect its interest. Otherwise, the party injured by
the other's breach will have to passively sit and watch its damages accumulate
during the pendency of the suit until the final judgment of rescission is rendered
when the law itself requires that he should exercise due diligence to minimize its
own damages (Civil Code, Article 2203). (Emphasis supplied)

Going back to the core issue, we rule that the promissory note in question is not a
negotiable instrument.

The pertinent portion of the note is as follows:

FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL
PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED
EIGHTY NINE PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said
principal sum, to be payable in 24 monthly installments starting July 15, 1978 and
every 15th of the month thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law
requires that a promissory note "must be payable to order or bearer, " it cannot be
denied that the promissory note in question is not a negotiable instrument.

The instrument in order to be considered negotiablility-i.e. must contain the so-


called 'words of negotiable, must be payable to 'order' or 'bearer'. These words
serve as an expression of consent that the instrument may be transferred. This
consent is indispensable since a maker assumes greater risk under a negotiable
instrument than under a non-negotiable one. ...

xxx xxx xxx

When instrument is payable to order.

SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order where it is


drawn payable to the order of a specified person or to him or his order. . . .

xxx xxx xxx

These are the only two ways by which an instrument may be made payable to order.
There must always be a specified person named in the instrument. It means that the
bill or note is to be paid to the person designated in the instrument or to any
person to whom he has indorsed and delivered the same. Without the words "or order"
or"to the order of, "the instrument is payable only to the person designated
therein and is therefore non-negotiable. Any subsequent purchaser thereof will not
enjoy the advantages of being a holder of a negotiable instrument but will merely
"step into the shoes" of the person designated in the instrument and will thus be
open to all defenses available against the latter." (Campos and Campos, Notes and
Selected Cases on Negotiable Instruments Law, Third Edition, page 38). (Emphasis
supplied)

Therefore, considering that the subject promissory note is not a negotiable


instrument, it follows that the respondent can never be a holder in due course but
remains a mere assignee of the note in question. Thus, the petitioner may raise
against the respondent all defenses available to it as against the seller-assignor
Industrial Products Marketing.

This being so, there was no need for the petitioner to implied the seller-assignor
when it was sued by the respondent-assignee because the petitioner's defenses apply
to both or either of either of them. Actually, the records show that even the
respondent itself admitted to being a mere assignee of the promissory note in
question, to wit:

ATTY. PALACA:

Did we get it right from the counsel that what is being assigned is the Deed of
Sale with Chattel Mortgage with the promissory note which is as testified to by the
witness was indorsed? (Counsel for Plaintiff nodding his head.) Then we have no
further questions on cross,

COURT:

You confirm his manifestation? You are nodding your head? Do you confirm that?

ATTY. ILAGAN:

The Deed of Sale cannot be assigned. A deed of sale is a transaction between two
persons; what is assigned are rights, the rights of the mortgagee were assigned to
the IFC Leasing & Acceptance Corporation.
COURT:

He puts it in a simple way as one-deed of sale and chattel mortgage were


assigned; . . . you want to make a distinction, one is an assignment of mortgage
right and the other one is indorsement of the promissory note. What counsel for
defendants wants is that you stipulate that it is contained in one single
transaction?

ATTY. ILAGAN:

We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).

Secondly, even conceding for purposes of discussion that the promissory note in
question is a negotiable instrument, the respondent cannot be a holder in due
course for a more significant reason.

The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the seller-assignor,
Industrial Products Marketing, and the respondent whereby the latter would pay the
seller-assignor the entire purchase price and the seller-assignor, in turn, would
assign its rights to the respondent which acquired the right to collect the price
from the buyer, herein petitioner Consolidated Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the
Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that said
documents evidencing the sale on installment of the tractors were all executed on
the same day by and among the buyer, which is herein petitioner Consolidated
Plywood Industries, Inc.; the seller-assignor which is the Industrial Products
Marketing; and the assignee-financing company, which is the respondent. Therefore,
the respondent had actual knowledge of the fact that the seller-assignor's right to
collect the purchase price was not unconditional, and that it was subject to the
condition that the tractors -sold were not defective. The respondent knew that when
the tractors turned out to be defective, it would be subject to the defense of
failure of consideration and cannot recover the purchase price from the
petitioners. Even assuming for the sake of argument that the promissory note is
negotiable, the respondent, which took the same with actual knowledge of the
foregoing facts so that its action in taking the instrument amounted to bad faith,
is not a holder in due course. As such, the respondent is subject to all defenses
which the petitioners may raise against the seller-assignor. Any other
interpretation would be most inequitous to the unfortunate buyer who is not only
saddled with two useless tractors but must also face a lawsuit from the assignee
for the entire purchase price and all its incidents without being able to raise
valid defenses available as against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no
knowledge of any fact, which would justify its act of taking the promissory note as
not amounting to bad faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.

xxx xxx xxx

SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due course is a
holder who has taken the instrument under the following conditions:

xxx xxx xxx

xxx xxx xxx


(c) That he took it in good faith and for value

(d) That the time it was negotiated by him he had no notice of any infirmity in
the instrument of deffect in the title of the person negotiating it

xxx xxx xxx

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of an


infirmity in the instrument or defect in the title of the person negotiating the
same, the person to whom it is negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that his action in taking the
instrument amounts to bad faith. (Emphasis supplied)

We subscribe to the view of Campos and Campos that a financing company is not a
holder in good faith as to the buyer, to wit:

In installment sales, the buyer usually issues a note payable to the seller to
cover the purchase price. Many times, in pursuance of a previous arrangement with
the seller, a finance company pays the full price and the note is indorsed to it,
subrogating it to the right to collect the price from the buyer, with interest.
With the increasing frequency of installment buying in this country, it is most
probable that the tendency of the courts in the United States to protect the buyer
against the finance company will , the finance company will be subject to the
defense of failure of consideration and cannot recover the purchase price from the
buyer. As against the argument that such a rule would seriously affect "a certain
mode of transacting business adopted throughout the State," a court in one case
stated:

It may be that our holding here will require some changes in business methods and
will impose a greater burden on the finance companies. We think the buyer-Mr. &
Mrs. General Public-should have some protection somewhere along the line. We
believe the finance company is better able to bear the risk of the dealer's
insolvency than the buyer and in a far better position to protect his interests
against unscrupulous and insolvent dealers. . . .

If this opinion imposes great burdens on finance companies it is a potent argument


in favor of a rule which win afford public protection to the general buying public
against unscrupulous dealers in personal property. . . . (Mutual Finance Co. v.
Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes and Selected
Cases on Negotiable Instruments Law, Third Edition, p. 128).

In the case of Commercial Credit Corporation v. Orange Country Machine Works (34
Cal. 2d 766) involving similar facts, it was held that in a very real sense, the
finance company was a moving force in the transaction from its very inception and
acted as a party to it. When a finance company actively participates in a
transaction of this type from its inception, it cannot be regarded as a holder in
due course of the note given in the transaction.

In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively participated in the
sale on installment of the subject two Allis Crawler tractors, cannot be regarded
as a holder in due course of said note. It follows that the respondent's rights
under the promissory note involved in this case are subject to all defenses that
the petitioners have against the seller-assignor, Industrial Products Marketing.
For Section 58 of the Negotiable Instruments Law provides that "in the hands of any
holder other than a holder in due course, a negotiable instrument is subject to the
same defenses as if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we find
that both the trial and respondent appellate court erred in holding the promissory
note in question to be negotiable. Such a ruling does not only violate the law and
applicable jurisprudence, but would result in unjust enrichment on the part of both
the assigner- assignor and respondent assignee at the expense of the petitioner-
corporation which rightfully rescinded an inequitable contract. We note, however,
that since the seller-assignor has not been impleaded herein, there is no obstacle
for the respondent to file a civil Suit and litigate its claims against the seller-
assignor in the rather unlikely possibility that it so desires,

WHEREFORE, in view of the foregoing, the decision of the respondent appellate court
dated July 17, 1985, as well as its resolution dated October 17, 1986, are hereby
ANNULLED and SET ASIDE. The complaint against the petitioner before the trial court
is DISMISSED.

SO ORDERED.

Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T. VERGARA,


petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.

Carpio, Villaraza & Cruz Law Offices for petitioners.

Europa, Dacanay & Tolentino for respondent.

GUTIERREZ, JR., J.:

This is a petition for certiorari under Rule 45 of the Rules of Court which assails
on questions of law a decision of the Intermediate Appellate Court in AC-G.R. CV
No. 68609 dated July 17, 1985, as well as its resolution dated October 17, 1985,
denying the motion for reconsideration.

The antecedent facts culled from the petition are as follows:

The petitioner is a corporation engaged in the logging business. It had for its
program of logging activities for the year 1978 the opening of additional roads,
and simultaneous logging operations along the route of said roads, in its logging
concession area at Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it
needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific
Company of Manila, through its sister company and marketing arm, Industrial
Products Marketing (the "seller-assignor"), a corporation dealing in tractors and
other heavy equipment business, offered to sell to petitioner-corporation two (2)
"Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B.

In order to ascertain the extent of work to which the tractors were to be exposed,
(t.s.n., May 28, 1980, p. 44) and to determine the capability of the "Used"
tractors being offered, petitioner-corporation requested the seller-assignor to
inspect the job site. After conducting said inspection, the seller-assignor assured
petitioner-corporation that the "Used" Allis Crawler Tractors which were being
offered were fit for the job, and gave the corresponding warranty of ninety (90)
days performance of the machines and availability of parts. (t.s.n., May 28, 1980,
pp. 59-66).

With said assurance and warranty, and relying on the seller-assignor's skill and
judgment, petitioner-corporation through petitioners Wee and Vergara, president and
vice- president, respectively, agreed to purchase on installment said two (2) units
of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten
Thousand Pesos (P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units
of tractors (Exh. "3-A"). At the same time, the deed of sale with chattel mortgage
with promissory note was executed (Exh. "2").

Simultaneously with the execution of the deed of sale with chattel mortgage with
promissory note, the seller-assignor, by means of a deed of assignment (E exh. " 1
"), assigned its rights and interest in the chattel mortgage in favor of the
respondent.

Immediately thereafter, the seller-assignor delivered said two (2) units of "Used"
tractors to the petitioner-corporation's job site and as agreed, the seller-
assignor stationed its own mechanics to supervise the operations of the machines.

Barely fourteen (14) days had elapsed after their delivery when one of the tractors
broke down and after another nine (9) days, the other tractor likewise broke down
(t.s.n., May 28, 1980, pp. 68-69).

On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-
assignor of the fact that the tractors broke down and requested for the seller-
assignor's usual prompt attention under the warranty (E exh. " 5 ").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the
seller-assignor sent to the job site its mechanics to conduct the necessary repairs
(Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did
not come out to be what they should be after the repairs were undertaken because
the units were no longer serviceable (t. s. n., May 28, 1980, p. 78).

Because of the breaking down of the tractors, the road building and simultaneous
logging operations of petitioner-corporation were delayed and petitioner Vergara
advised the seller-assignor that the payments of the installments as listed in the
promissory note would likewise be delayed until the seller-assignor completely
fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee
asked the seller-assignor to pull out the units and have them reconditioned, and
thereafter to offer them for sale. The proceeds were to be given to the respondent
and the excess, if any, to be divided between the seller-assignor and petitioner-
corporation which offered to bear one-half (1/2) of the reconditioning cost (E exh.
" 7 ").

No response to this letter, Exhibit "7," was received by the petitioner-corporation


and despite several follow-up calls, the seller-assignor did nothing with regard to
the request, until the complaint in this case was filed by the respondent against
the petitioners, the corporation, Wee, and Vergara.

The complaint was filed by the respondent against the petitioners for the recovery
of the principal sum of One Million Ninety Three Thousand Seven Hundred Eighty Nine
Pesos & 71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One Thousand
Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing
interest thereafter at the rate of twelve (12%) percent per annum, attorney's fees
of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and
costs of suit.

The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the petitioners
damages in an amount at the sound discretion of the court, Twenty Thousand Pesos
(P20,000.00) as and for attorney's fees, and Five Thousand Pesos (P5,000.00) for
expenses of litigation. The petitioners likewise prayed for such other and further
relief as would be just under the premises.

In a decision dated April 20, 1981, the trial court rendered the following
judgment:

WHEREFORE, judgment is hereby rendered:

1. ordering defendants to pay jointly and severally in their official and


personal capacities the principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN
HUNDRED NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of ONE
HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as of
August 15, 1979 and accruing interest thereafter at the rate of 12% per annum;

2. ordering defendants to pay jointly and severally attorney's fees equivalent


to ten percent (10%) of the principal and to pay the costs of the suit.

Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and assigned
therein the following errors:

THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC
COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.

II

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN DUE
COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE
COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the challenged decision
affirming in toto the decision of the trial court. The pertinent portions of the
decision are as follows:
xxx xxx xxx

From the evidence presented by the parties on the issue of warranty, We are of the
considered opinion that aside from the fact that no provision of warranty appears
or is provided in the Deed of Sale of the tractors and even admitting that in a
contract of sale unless a contrary intention appears, there is an implied warranty,
the defense of breach of warranty, if there is any, as in this case, does not lie
in favor of the appellants and against the plaintiff-appellee who is the assignee
of the promissory note and a holder of the same in due course. Warranty lies in
this case only between Industrial Products Marketing and Consolidated Plywood
Industries, Inc. The plaintiff-appellant herein upon application by appellant
corporation granted financing for the purchase of the questioned units of Fiat-
Allis Crawler,Tractors.

xxx xxx xxx

Holding that breach of warranty if any, is not a defense available to appellants


either to withdraw from the contract and/or demand a proportionate reduction of the
price with damages in either case (Art. 1567, New Civil Code). We now come to the
issue as to whether the plaintiff-appellee is a holder in due course of the
promissory note.

To begin with, it is beyond arguments that the plaintiff-appellee is a financing


corporation engaged in financing and receivable discounting extending credit
facilities to consumers and industrial, commercial or agricultural enterprises by
discounting or factoring commercial papers or accounts receivable duly authorized
pursuant to R.A. 5980 otherwise known as the Financing Act.

A study of the questioned promissory note reveals that it is a negotiable


instrument which was discounted or sold to the IFC Leasing and Acceptance
Corporation for P800,000.00 (Exh. "A") considering the following. it is in writing
and signed by the maker; it contains an unconditional promise to pay a certain sum
of money payable at a fixed or determinable future time; it is payable to order
(Sec. 1, NIL); the promissory note was negotiated when it was transferred and
delivered by IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it
was taken in the conditions that the note was complete and regular upon its face
before the same was overdue and without notice, that it had been previously
dishonored and that the note is in good faith and for value without notice of any
infirmity or defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and
Acceptance Corporation held the instrument free from any defect of title of prior
parties and free from defenses available to prior parties among themselves and may
enforce payment of the instrument for the full amount thereof against all parties
liable thereon (Sec. 57, NIL); the appellants engaged that they would pay the note
according to its tenor, and admit the existence of the payee IPM and its capacity
to endorse (Sec. 60, NIL).

In view of the essential elements found in the questioned promissory note, We opine
that the same is legally and conclusively enforceable against the defendants-
appellants.

WHEREFORE, finding the decision appealed from according to law and evidence, We
find the appeal without merit and thus affirm the decision in toto. With costs
against the appellants. (pp. 50-55, Rollo)

The petitioners' motion for reconsideration of the decision of July 17, 1985 was
denied by the Intermediate Appellate Court in its resolution dated October 17,
1985, a copy of which was received by the petitioners on October 21, 1985.

Hence, this petition was filed on the following grounds:


I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED
UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.

II

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE
SUBJECT PROMISSORY NOTE.

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE TRANSFER OF
RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE
RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR,
INDUSTRIAL PRODUCTS MARKETING.

IV.

THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE
PROMISSORY NOTE.

V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.

VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT BECAUSE THE
REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED.

The petitioners prayed that judgment be rendered setting aside the decision dated
July 17, 1985, as well as the resolution dated October 17, 1985 and dismissing the
complaint but granting petitioners' counterclaims before the court of origin.

On the other hand, the respondent corporation in its comment to the petition filed
on February 20, 1986, contended that the petition was filed out of time; that the
promissory note is a negotiable instrument and respondent a holder in due course;
that respondent is not liable for any breach of warranty; and finally, that the
promissory note is admissible in evidence.

The core issue herein is whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the available defenses of the
petitioner against the respondent-assignee.

Preliminarily, it must be established at the outset that we consider the instant


petition to have been filed on time because the petitioners' motion for
reconsideration actually raised new issues. It cannot, therefore, be considered
pro- formal.

The petition is impressed with merit.


First, there is no question that the seller-assignor breached its express 90-day
warranty because the findings of the trial court, adopted by the respondent
appellate court, that "14 days after delivery, the first tractor broke down and 9
days, thereafter, the second tractor became inoperable" are sustained by the
records. The petitioner was clearly a victim of a warranty not honored by the
maker.

The Civil Code provides that:

ART. 1561. The vendor shall be responsible for warranty against the hidden defects
which the thing sold may have, should they render it unfit for the use for which it
is intended, or should they diminish its fitness for such use to such an extent
that, had the vendee been aware thereof, he would not have acquired it or would
have given a lower price for it; but said vendor shall not be answerable for patent
defects or those which may be visible, or for those which are not visible if the
vendee is an expert who, by reason of his trade or profession, should have known
them.

ART. 1562. In a sale of goods, there is an implied warranty or condition as to the


quality or fitness of the goods, as follows:

(1) Where the buyer, expressly or by implication makes known to the seller the
particular purpose for which the goods are acquired, and it appears that the buyer
relies on the sellers skill or judge judgment (whether he be the grower or
manufacturer or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;

xxx xxx xxx

ART. 1564. An implied warranty or condition as to the quality or fitness for a


particular purpose may be annexed by the usage of trade.

xxx xxx xxx

ART. 1566. The vendor is responsible to the vendee for any hidden faults or
defects in the thing sold even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor
was not aware of the hidden faults or defects in the thing sold. (Emphasis
supplied).

It is patent then, that the seller-assignor is liable for its breach of warranty
against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the assignee is a
holder in due course of the promissory note in question, assuming the note is
negotiable, in which case the latter's rights are based on the negotiable
instrument and assuming further that the petitioner's defenses may not prevail
against it.

Secondly, it likewise cannot be denied that as soon as the tractors broke down, the
petitioner-corporation notified the seller-assignor's sister company, AG & P, about
the breakdown based on the seller-assignor's express 90-day warranty, with which
the latter complied by sending its mechanics. However, due to the seller-assignor's
delay and its failure to comply with its warranty, the tractors became totally
unserviceable and useless for the purpose for which they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its


contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.

xxx xxx xxx

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee
may elect between withdrawing from the contract and demanding a proportionate
reduction of the price, with damages in either case. (Emphasis supplied)

Petitioner, having unilaterally and extrajudicially rescinded its contract with the
seller-assignor, necessarily can no longer sue the seller-assignor except by way of
counterclaim if the seller-assignor sues it because of the rescission.

In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we
held:

In other words, the party who deems the contract violated may consider it resolved
or rescinded, and act accordingly, without previous court action, but it proceeds
at its own risk. For it is only the final judgment of the corresponding court that
will conclusively and finally settle whether the action taken was or was not
correct in law. But the law definitely does not require that the contracting party
who believes itself injured must first file suit and wait for adjudgement before
taking extrajudicial steps to protect its interest. Otherwise, the party injured by
the other's breach will have to passively sit and watch its damages accumulate
during the pendency of the suit until the final judgment of rescission is rendered
when the law itself requires that he should exercise due diligence to minimize its
own damages (Civil Code, Article 2203). (Emphasis supplied)

Going back to the core issue, we rule that the promissory note in question is not a
negotiable instrument.

The pertinent portion of the note is as follows:

FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL
PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED
EIGHTY NINE PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said
principal sum, to be payable in 24 monthly installments starting July 15, 1978 and
every 15th of the month thereafter until fully paid. ...

Considering that paragraph (d), Section 1 of the Negotiable Instruments Law


requires that a promissory note "must be payable to order or bearer, " it cannot be
denied that the promissory note in question is not a negotiable instrument.

The instrument in order to be considered negotiablility-i.e. must contain the so-


called 'words of negotiable, must be payable to 'order' or 'bearer'. These words
serve as an expression of consent that the instrument may be transferred. This
consent is indispensable since a maker assumes greater risk under a negotiable
instrument than under a non-negotiable one. ...

xxx xxx xxx

When instrument is payable to order.


SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order where it is
drawn payable to the order of a specified person or to him or his order. . . .

xxx xxx xxx

These are the only two ways by which an instrument may be made payable to order.
There must always be a specified person named in the instrument. It means that the
bill or note is to be paid to the person designated in the instrument or to any
person to whom he has indorsed and delivered the same. Without the words "or order"
or"to the order of, "the instrument is payable only to the person designated
therein and is therefore non-negotiable. Any subsequent purchaser thereof will not
enjoy the advantages of being a holder of a negotiable instrument but will merely
"step into the shoes" of the person designated in the instrument and will thus be
open to all defenses available against the latter." (Campos and Campos, Notes and
Selected Cases on Negotiable Instruments Law, Third Edition, page 38). (Emphasis
supplied)

Therefore, considering that the subject promissory note is not a negotiable


instrument, it follows that the respondent can never be a holder in due course but
remains a mere assignee of the note in question. Thus, the petitioner may raise
against the respondent all defenses available to it as against the seller-assignor
Industrial Products Marketing.

This being so, there was no need for the petitioner to implied the seller-assignor
when it was sued by the respondent-assignee because the petitioner's defenses apply
to both or either of either of them. Actually, the records show that even the
respondent itself admitted to being a mere assignee of the promissory note in
question, to wit:

ATTY. PALACA:

Did we get it right from the counsel that what is being assigned is the Deed of
Sale with Chattel Mortgage with the promissory note which is as testified to by the
witness was indorsed? (Counsel for Plaintiff nodding his head.) Then we have no
further questions on cross,

COURT:

You confirm his manifestation? You are nodding your head? Do you confirm that?

ATTY. ILAGAN:

The Deed of Sale cannot be assigned. A deed of sale is a transaction between two
persons; what is assigned are rights, the rights of the mortgagee were assigned to
the IFC Leasing & Acceptance Corporation.

COURT:

He puts it in a simple way as one-deed of sale and chattel mortgage were


assigned; . . . you want to make a distinction, one is an assignment of mortgage
right and the other one is indorsement of the promissory note. What counsel for
defendants wants is that you stipulate that it is contained in one single
transaction?

ATTY. ILAGAN:

We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).

Secondly, even conceding for purposes of discussion that the promissory note in
question is a negotiable instrument, the respondent cannot be a holder in due
course for a more significant reason.

The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the seller-assignor,
Industrial Products Marketing, and the respondent whereby the latter would pay the
seller-assignor the entire purchase price and the seller-assignor, in turn, would
assign its rights to the respondent which acquired the right to collect the price
from the buyer, herein petitioner Consolidated Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the
Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that said
documents evidencing the sale on installment of the tractors were all executed on
the same day by and among the buyer, which is herein petitioner Consolidated
Plywood Industries, Inc.; the seller-assignor which is the Industrial Products
Marketing; and the assignee-financing company, which is the respondent. Therefore,
the respondent had actual knowledge of the fact that the seller-assignor's right to
collect the purchase price was not unconditional, and that it was subject to the
condition that the tractors -sold were not defective. The respondent knew that when
the tractors turned out to be defective, it would be subject to the defense of
failure of consideration and cannot recover the purchase price from the
petitioners. Even assuming for the sake of argument that the promissory note is
negotiable, the respondent, which took the same with actual knowledge of the
foregoing facts so that its action in taking the instrument amounted to bad faith,
is not a holder in due course. As such, the respondent is subject to all defenses
which the petitioners may raise against the seller-assignor. Any other
interpretation would be most inequitous to the unfortunate buyer who is not only
saddled with two useless tractors but must also face a lawsuit from the assignee
for the entire purchase price and all its incidents without being able to raise
valid defenses available as against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no
knowledge of any fact, which would justify its act of taking the promissory note as
not amounting to bad faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.

xxx xxx xxx

SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due course is a
holder who has taken the instrument under the following conditions:

xxx xxx xxx

xxx xxx xxx

(c) That he took it in good faith and for value

(d) That the time it was negotiated by him he had no notice of any infirmity in
the instrument of deffect in the title of the person negotiating it

xxx xxx xxx

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of an


infirmity in the instrument or defect in the title of the person negotiating the
same, the person to whom it is negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that his action in taking the
instrument amounts to bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company is not a
holder in good faith as to the buyer, to wit:

In installment sales, the buyer usually issues a note payable to the seller to
cover the purchase price. Many times, in pursuance of a previous arrangement with
the seller, a finance company pays the full price and the note is indorsed to it,
subrogating it to the right to collect the price from the buyer, with interest.
With the increasing frequency of installment buying in this country, it is most
probable that the tendency of the courts in the United States to protect the buyer
against the finance company will , the finance company will be subject to the
defense of failure of consideration and cannot recover the purchase price from the
buyer. As against the argument that such a rule would seriously affect "a certain
mode of transacting business adopted throughout the State," a court in one case
stated:

It may be that our holding here will require some changes in business methods and
will impose a greater burden on the finance companies. We think the buyer-Mr. &
Mrs. General Public-should have some protection somewhere along the line. We
believe the finance company is better able to bear the risk of the dealer's
insolvency than the buyer and in a far better position to protect his interests
against unscrupulous and insolvent dealers. . . .

If this opinion imposes great burdens on finance companies it is a potent argument


in favor of a rule which win afford public protection to the general buying public
against unscrupulous dealers in personal property. . . . (Mutual Finance Co. v.
Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes and Selected
Cases on Negotiable Instruments Law, Third Edition, p. 128).

In the case of Commercial Credit Corporation v. Orange Country Machine Works (34
Cal. 2d 766) involving similar facts, it was held that in a very real sense, the
finance company was a moving force in the transaction from its very inception and
acted as a party to it. When a finance company actively participates in a
transaction of this type from its inception, it cannot be regarded as a holder in
due course of the note given in the transaction.

In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively participated in the
sale on installment of the subject two Allis Crawler tractors, cannot be regarded
as a holder in due course of said note. It follows that the respondent's rights
under the promissory note involved in this case are subject to all defenses that
the petitioners have against the seller-assignor, Industrial Products Marketing.
For Section 58 of the Negotiable Instruments Law provides that "in the hands of any
holder other than a holder in due course, a negotiable instrument is subject to the
same defenses as if it were non-negotiable. ... "

Prescinding from the foregoing and setting aside other peripheral issues, we find
that both the trial and respondent appellate court erred in holding the promissory
note in question to be negotiable. Such a ruling does not only violate the law and
applicable jurisprudence, but would result in unjust enrichment on the part of both
the assigner- assignor and respondent assignee at the expense of the petitioner-
corporation which rightfully rescinded an inequitable contract. We note, however,
that since the seller-assignor has not been impleaded herein, there is no obstacle
for the respondent to file a civil Suit and litigate its claims against the seller-
assignor in the rather unlikely possibility that it so desires,

WHEREFORE, in view of the foregoing, the decision of the respondent appellate court
dated July 17, 1985, as well as its resolution dated October 17, 1986, are hereby
ANNULLED and SET ASIDE. The complaint against the petitioner before the trial court
is DISMISSED.
SO ORDERED.

Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T. VERGARA,


petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.

Carpio, Villaraza & Cruz Law Offices for petitioners.

Europa, Dacanay & Tolentino for respondent.

GUTIERREZ, JR., J.:

This is a petition for certiorari under Rule 45 of the Rules of Court which assails
on questions of law a decision of the Intermediate Appellate Court in AC-G.R. CV
No. 68609 dated July 17, 1985, as well as its resolution dated October 17, 1985,
denying the motion for reconsideration.

The antecedent facts culled from the petition are as follows:

The petitioner is a corporation engaged in the logging business. It had for its
program of logging activities for the year 1978 the opening of additional roads,
and simultaneous logging operations along the route of said roads, in its logging
concession area at Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it
needed two (2) additional units of tractors.

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific


Company of Manila, through its sister company and marketing arm, Industrial
Products Marketing (the "seller-assignor"), a corporation dealing in tractors and
other heavy equipment business, offered to sell to petitioner-corporation two (2)
"Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B.

In order to ascertain the extent of work to which the tractors were to be exposed,
(t.s.n., May 28, 1980, p. 44) and to determine the capability of the "Used"
tractors being offered, petitioner-corporation requested the seller-assignor to
inspect the job site. After conducting said inspection, the seller-assignor assured
petitioner-corporation that the "Used" Allis Crawler Tractors which were being
offered were fit for the job, and gave the corresponding warranty of ninety (90)
days performance of the machines and availability of parts. (t.s.n., May 28, 1980,
pp. 59-66).

With said assurance and warranty, and relying on the seller-assignor's skill and
judgment, petitioner-corporation through petitioners Wee and Vergara, president and
vice- president, respectively, agreed to purchase on installment said two (2) units
of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten
Thousand Pesos (P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units
of tractors (Exh. "3-A"). At the same time, the deed of sale with chattel mortgage
with promissory note was executed (Exh. "2").

Simultaneously with the execution of the deed of sale with chattel mortgage with
promissory note, the seller-assignor, by means of a deed of assignment (E exh. " 1
"), assigned its rights and interest in the chattel mortgage in favor of the
respondent.

Immediately thereafter, the seller-assignor delivered said two (2) units of "Used"
tractors to the petitioner-corporation's job site and as agreed, the seller-
assignor stationed its own mechanics to supervise the operations of the machines.

Barely fourteen (14) days had elapsed after their delivery when one of the tractors
broke down and after another nine (9) days, the other tractor likewise broke down
(t.s.n., May 28, 1980, pp. 68-69).

On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-
assignor of the fact that the tractors broke down and requested for the seller-
assignor's usual prompt attention under the warranty (E exh. " 5 ").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the
seller-assignor sent to the job site its mechanics to conduct the necessary repairs
(Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did
not come out to be what they should be after the repairs were undertaken because
the units were no longer serviceable (t. s. n., May 28, 1980, p. 78).

Because of the breaking down of the tractors, the road building and simultaneous
logging operations of petitioner-corporation were delayed and petitioner Vergara
advised the seller-assignor that the payments of the installments as listed in the
promissory note would likewise be delayed until the seller-assignor completely
fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee
asked the seller-assignor to pull out the units and have them reconditioned, and
thereafter to offer them for sale. The proceeds were to be given to the respondent
and the excess, if any, to be divided between the seller-assignor and petitioner-
corporation which offered to bear one-half (1/2) of the reconditioning cost (E exh.
" 7 ").

No response to this letter, Exhibit "7," was received by the petitioner-corporation


and despite several follow-up calls, the seller-assignor did nothing with regard to
the request, until the complaint in this case was filed by the respondent against
the petitioners, the corporation, Wee, and Vergara.

The complaint was filed by the respondent against the petitioners for the recovery
of the principal sum of One Million Ninety Three Thousand Seven Hundred Eighty Nine
Pesos & 71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One Thousand
Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing
interest thereafter at the rate of twelve (12%) percent per annum, attorney's fees
of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and
costs of suit.

The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the petitioners
damages in an amount at the sound discretion of the court, Twenty Thousand Pesos
(P20,000.00) as and for attorney's fees, and Five Thousand Pesos (P5,000.00) for
expenses of litigation. The petitioners likewise prayed for such other and further
relief as would be just under the premises.

In a decision dated April 20, 1981, the trial court rendered the following
judgment:

WHEREFORE, judgment is hereby rendered:

1. ordering defendants to pay jointly and severally in their official and


personal capacities the principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN
HUNDRED NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of ONE
HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as of
August 15, 1979 and accruing interest thereafter at the rate of 12% per annum;

2. ordering defendants to pay jointly and severally attorney's fees equivalent


to ten percent (10%) of the principal and to pay the costs of the suit.

Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and assigned
therein the following errors:

THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC
COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.

II

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN DUE
COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE
COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the challenged decision
affirming in toto the decision of the trial court. The pertinent portions of the
decision are as follows:

xxx xxx xxx

From the evidence presented by the parties on the issue of warranty, We are of the
considered opinion that aside from the fact that no provision of warranty appears
or is provided in the Deed of Sale of the tractors and even admitting that in a
contract of sale unless a contrary intention appears, there is an implied warranty,
the defense of breach of warranty, if there is any, as in this case, does not lie
in favor of the appellants and against the plaintiff-appellee who is the assignee
of the promissory note and a holder of the same in due course. Warranty lies in
this case only between Industrial Products Marketing and Consolidated Plywood
Industries, Inc. The plaintiff-appellant herein upon application by appellant
corporation granted financing for the purchase of the questioned units of Fiat-
Allis Crawler,Tractors.
xxx xxx xxx

Holding that breach of warranty if any, is not a defense available to appellants


either to withdraw from the contract and/or demand a proportionate reduction of the
price with damages in either case (Art. 1567, New Civil Code). We now come to the
issue as to whether the plaintiff-appellee is a holder in due course of the
promissory note.

To begin with, it is beyond arguments that the plaintiff-appellee is a financing


corporation engaged in financing and receivable discounting extending credit
facilities to consumers and industrial, commercial or agricultural enterprises by
discounting or factoring commercial papers or accounts receivable duly authorized
pursuant to R.A. 5980 otherwise known as the Financing Act.

A study of the questioned promissory note reveals that it is a negotiable


instrument which was discounted or sold to the IFC Leasing and Acceptance
Corporation for P800,000.00 (Exh. "A") considering the following. it is in writing
and signed by the maker; it contains an unconditional promise to pay a certain sum
of money payable at a fixed or determinable future time; it is payable to order
(Sec. 1, NIL); the promissory note was negotiated when it was transferred and
delivered by IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it
was taken in the conditions that the note was complete and regular upon its face
before the same was overdue and without notice, that it had been previously
dishonored and that the note is in good faith and for value without notice of any
infirmity or defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and
Acceptance Corporation held the instrument free from any defect of title of prior
parties and free from defenses available to prior parties among themselves and may
enforce payment of the instrument for the full amount thereof against all parties
liable thereon (Sec. 57, NIL); the appellants engaged that they would pay the note
according to its tenor, and admit the existence of the payee IPM and its capacity
to endorse (Sec. 60, NIL).

In view of the essential elements found in the questioned promissory note, We opine
that the same is legally and conclusively enforceable against the defendants-
appellants.

WHEREFORE, finding the decision appealed from according to law and evidence, We
find the appeal without merit and thus affirm the decision in toto. With costs
against the appellants. (pp. 50-55, Rollo)

The petitioners' motion for reconsideration of the decision of July 17, 1985 was
denied by the Intermediate Appellate Court in its resolution dated October 17,
1985, a copy of which was received by the petitioners on October 21, 1985.

Hence, this petition was filed on the following grounds:

I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED
UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.

II

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE
SUBJECT PROMISSORY NOTE.

III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE TRANSFER OF
RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE
RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR,
INDUSTRIAL PRODUCTS MARKETING.

IV.

THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE
PROMISSORY NOTE.

V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.

VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT BECAUSE THE
REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED.

The petitioners prayed that judgment be rendered setting aside the decision dated
July 17, 1985, as well as the resolution dated October 17, 1985 and dismissing the
complaint but granting petitioners' counterclaims before the court of origin.

On the other hand, the respondent corporation in its comment to the petition filed
on February 20, 1986, contended that the petition was filed out of time; that the
promissory note is a negotiable instrument and respondent a holder in due course;
that respondent is not liable for any breach of warranty; and finally, that the
promissory note is admissible in evidence.

The core issue herein is whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the available defenses of the
petitioner against the respondent-assignee.

Preliminarily, it must be established at the outset that we consider the instant


petition to have been filed on time because the petitioners' motion for
reconsideration actually raised new issues. It cannot, therefore, be considered
pro- formal.

The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-day
warranty because the findings of the trial court, adopted by the respondent
appellate court, that "14 days after delivery, the first tractor broke down and 9
days, thereafter, the second tractor became inoperable" are sustained by the
records. The petitioner was clearly a victim of a warranty not honored by the
maker.

The Civil Code provides that:

ART. 1561. The vendor shall be responsible for warranty against the hidden defects
which the thing sold may have, should they render it unfit for the use for which it
is intended, or should they diminish its fitness for such use to such an extent
that, had the vendee been aware thereof, he would not have acquired it or would
have given a lower price for it; but said vendor shall not be answerable for patent
defects or those which may be visible, or for those which are not visible if the
vendee is an expert who, by reason of his trade or profession, should have known
them.

ART. 1562. In a sale of goods, there is an implied warranty or condition as to the


quality or fitness of the goods, as follows:

(1) Where the buyer, expressly or by implication makes known to the seller the
particular purpose for which the goods are acquired, and it appears that the buyer
relies on the sellers skill or judge judgment (whether he be the grower or
manufacturer or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;

xxx xxx xxx

ART. 1564. An implied warranty or condition as to the quality or fitness for a


particular purpose may be annexed by the usage of trade.

xxx xxx xxx

ART. 1566. The vendor is responsible to the vendee for any hidden faults or
defects in the thing sold even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor
was not aware of the hidden faults or defects in the thing sold. (Emphasis
supplied).

It is patent then, that the seller-assignor is liable for its breach of warranty
against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the assignee is a
holder in due course of the promissory note in question, assuming the note is
negotiable, in which case the latter's rights are based on the negotiable
instrument and assuming further that the petitioner's defenses may not prevail
against it.

Secondly, it likewise cannot be denied that as soon as the tractors broke down, the
petitioner-corporation notified the seller-assignor's sister company, AG & P, about
the breakdown based on the seller-assignor's express 90-day warranty, with which
the latter complied by sending its mechanics. However, due to the seller-assignor's
delay and its failure to comply with its warranty, the tractors became totally
unserviceable and useless for the purpose for which they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its


contract with the seller-assignor.

Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.

xxx xxx xxx

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee
may elect between withdrawing from the contract and demanding a proportionate
reduction of the price, with damages in either case. (Emphasis supplied)

Petitioner, having unilaterally and extrajudicially rescinded its contract with the
seller-assignor, necessarily can no longer sue the seller-assignor except by way of
counterclaim if the seller-assignor sues it because of the rescission.

In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we
held:

In other words, the party who deems the contract violated may consider it resolved
or rescinded, and act accordingly, without previous court action, but it proceeds
at its own risk. For it is only the final judgment of the corresponding court that
will conclusively and finally settle whether the action taken was or was not
correct in law. But the law definitely does not require that the contracting party
who believes itself injured must first file suit and wait for adjudgement before
taking extrajudicial steps to protect its interest. Otherwise, the party injured by
the other's breach will have to passively sit and watch its damages accumulate
during the pendency of the suit until the final judgment of rescission is rendered
when the law itself requires that he should exercise due diligence to minimize its
own damages (Civil Code, Article 2203). (Emphasis supplied)

Going back to the core issue, we rule that the promissory note in question is not a
negotiable instrument.

The pertinent portion of the note is as follows:

FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL
PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED
EIGHTY NINE PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said
principal sum, to be payable in 24 monthly installments starting July 15, 1978 and
every 15th of the month thereafter until fully paid. ...

Considering that paragraph (d), Section 1 of the Negotiable Instruments Law


requires that a promissory note "must be payable to order or bearer, " it cannot be
denied that the promissory note in question is not a negotiable instrument.

The instrument in order to be considered negotiablility-i.e. must contain the so-


called 'words of negotiable, must be payable to 'order' or 'bearer'. These words
serve as an expression of consent that the instrument may be transferred. This
consent is indispensable since a maker assumes greater risk under a negotiable
instrument than under a non-negotiable one. ...

xxx xxx xxx

When instrument is payable to order.

SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order where it is


drawn payable to the order of a specified person or to him or his order. . . .

xxx xxx xxx

These are the only two ways by which an instrument may be made payable to order.
There must always be a specified person named in the instrument. It means that the
bill or note is to be paid to the person designated in the instrument or to any
person to whom he has indorsed and delivered the same. Without the words "or order"
or"to the order of, "the instrument is payable only to the person designated
therein and is therefore non-negotiable. Any subsequent purchaser thereof will not
enjoy the advantages of being a holder of a negotiable instrument but will merely
"step into the shoes" of the person designated in the instrument and will thus be
open to all defenses available against the latter." (Campos and Campos, Notes and
Selected Cases on Negotiable Instruments Law, Third Edition, page 38). (Emphasis
supplied)

Therefore, considering that the subject promissory note is not a negotiable


instrument, it follows that the respondent can never be a holder in due course but
remains a mere assignee of the note in question. Thus, the petitioner may raise
against the respondent all defenses available to it as against the seller-assignor
Industrial Products Marketing.

This being so, there was no need for the petitioner to implied the seller-assignor
when it was sued by the respondent-assignee because the petitioner's defenses apply
to both or either of either of them. Actually, the records show that even the
respondent itself admitted to being a mere assignee of the promissory note in
question, to wit:

ATTY. PALACA:

Did we get it right from the counsel that what is being assigned is the Deed of
Sale with Chattel Mortgage with the promissory note which is as testified to by the
witness was indorsed? (Counsel for Plaintiff nodding his head.) Then we have no
further questions on cross,

COURT:

You confirm his manifestation? You are nodding your head? Do you confirm that?

ATTY. ILAGAN:

The Deed of Sale cannot be assigned. A deed of sale is a transaction between two
persons; what is assigned are rights, the rights of the mortgagee were assigned to
the IFC Leasing & Acceptance Corporation.

COURT:

He puts it in a simple way as one-deed of sale and chattel mortgage were


assigned; . . . you want to make a distinction, one is an assignment of mortgage
right and the other one is indorsement of the promissory note. What counsel for
defendants wants is that you stipulate that it is contained in one single
transaction?

ATTY. ILAGAN:

We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).

Secondly, even conceding for purposes of discussion that the promissory note in
question is a negotiable instrument, the respondent cannot be a holder in due
course for a more significant reason.

The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the seller-assignor,
Industrial Products Marketing, and the respondent whereby the latter would pay the
seller-assignor the entire purchase price and the seller-assignor, in turn, would
assign its rights to the respondent which acquired the right to collect the price
from the buyer, herein petitioner Consolidated Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the
Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that said
documents evidencing the sale on installment of the tractors were all executed on
the same day by and among the buyer, which is herein petitioner Consolidated
Plywood Industries, Inc.; the seller-assignor which is the Industrial Products
Marketing; and the assignee-financing company, which is the respondent. Therefore,
the respondent had actual knowledge of the fact that the seller-assignor's right to
collect the purchase price was not unconditional, and that it was subject to the
condition that the tractors -sold were not defective. The respondent knew that when
the tractors turned out to be defective, it would be subject to the defense of
failure of consideration and cannot recover the purchase price from the
petitioners. Even assuming for the sake of argument that the promissory note is
negotiable, the respondent, which took the same with actual knowledge of the
foregoing facts so that its action in taking the instrument amounted to bad faith,
is not a holder in due course. As such, the respondent is subject to all defenses
which the petitioners may raise against the seller-assignor. Any other
interpretation would be most inequitous to the unfortunate buyer who is not only
saddled with two useless tractors but must also face a lawsuit from the assignee
for the entire purchase price and all its incidents without being able to raise
valid defenses available as against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no
knowledge of any fact, which would justify its act of taking the promissory note as
not amounting to bad faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.

xxx xxx xxx

SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due course is a
holder who has taken the instrument under the following conditions:

xxx xxx xxx

xxx xxx xxx

(c) That he took it in good faith and for value

(d) That the time it was negotiated by him he had no notice of any infirmity in
the instrument of deffect in the title of the person negotiating it

xxx xxx xxx

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of an


infirmity in the instrument or defect in the title of the person negotiating the
same, the person to whom it is negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that his action in taking the
instrument amounts to bad faith. (Emphasis supplied)

We subscribe to the view of Campos and Campos that a financing company is not a
holder in good faith as to the buyer, to wit:

In installment sales, the buyer usually issues a note payable to the seller to
cover the purchase price. Many times, in pursuance of a previous arrangement with
the seller, a finance company pays the full price and the note is indorsed to it,
subrogating it to the right to collect the price from the buyer, with interest.
With the increasing frequency of installment buying in this country, it is most
probable that the tendency of the courts in the United States to protect the buyer
against the finance company will , the finance company will be subject to the
defense of failure of consideration and cannot recover the purchase price from the
buyer. As against the argument that such a rule would seriously affect "a certain
mode of transacting business adopted throughout the State," a court in one case
stated:

It may be that our holding here will require some changes in business methods and
will impose a greater burden on the finance companies. We think the buyer-Mr. &
Mrs. General Public-should have some protection somewhere along the line. We
believe the finance company is better able to bear the risk of the dealer's
insolvency than the buyer and in a far better position to protect his interests
against unscrupulous and insolvent dealers. . . .

If this opinion imposes great burdens on finance companies it is a potent argument


in favor of a rule which win afford public protection to the general buying public
against unscrupulous dealers in personal property. . . . (Mutual Finance Co. v.
Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes and Selected
Cases on Negotiable Instruments Law, Third Edition, p. 128).

In the case of Commercial Credit Corporation v. Orange Country Machine Works (34
Cal. 2d 766) involving similar facts, it was held that in a very real sense, the
finance company was a moving force in the transaction from its very inception and
acted as a party to it. When a finance company actively participates in a
transaction of this type from its inception, it cannot be regarded as a holder in
due course of the note given in the transaction.

In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively participated in the
sale on installment of the subject two Allis Crawler tractors, cannot be regarded
as a holder in due course of said note. It follows that the respondent's rights
under the promissory note involved in this case are subject to all defenses that
the petitioners have against the seller-assignor, Industrial Products Marketing.
For Section 58 of the Negotiable Instruments Law provides that "in the hands of any
holder other than a holder in due course, a negotiable instrument is subject to the
same defenses as if it were non-negotiable. ... "

Prescinding from the foregoing and setting aside other peripheral issues, we find
that both the trial and respondent appellate court erred in holding the promissory
note in question to be negotiable. Such a ruling does not only violate the law and
applicable jurisprudence, but would result in unjust enrichment on the part of both
the assigner- assignor and respondent assignee at the expense of the petitioner-
corporation which rightfully rescinded an inequitable contract. We note, however,
that since the seller-assignor has not been impleaded herein, there is no obstacle
for the respondent to file a civil Suit and litigate its claims against the seller-
assignor in the rather unlikely possibility that it so desires,

WHEREFORE, in view of the foregoing, the decision of the respondent appellate court
dated July 17, 1985, as well as its resolution dated October 17, 1986, are hereby
ANNULLED and SET ASIDE. The complaint against the petitioner before the trial court
is DISMISSED.

SO ORDERED.

Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.

The Lawphil Project - Arellano Law Foundation


Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-2516 September 25, 1950

ANG TEK LIAN, petitioner,


vs.
THE COURT OF APPEALS, respondent.

Laurel, Sabido, Almario and Laurel for petitioner.


Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz
for respondent.

BENGZON, J.:

For having issued a rubber check, Ang Tek Lian was convicted of estafa in the Court
of First Instance of Manila. The Court of Appeals affirmed the verdict.

It appears that, knowing he had no funds therefor, Ang Tek Lian drew on Saturday,
November 16, 1946, the check Exhibits A upon the China Banking Corporation for the
sum of P4,000, payable to the order of "cash". He delivered it to Lee Hua Hong in
exchange for money which the latter handed in act. On November 18, 1946, the next
business day, the check was presented by Lee Hua Hong to the drawee bank for
payment, but it was dishonored for insufficiency of funds, the balance of the
deposit of Ang Tek Lian on both dates being P335 only.

The Court of Appeals believed the version of Lee Huan Hong who testified that "on
November 16, 1946, appellant went to his (complainant's) office, at 1217 Herran,
Paco, Manila, and asked him to exchange Exhibit A — which he (appellant) then
brought with him — with cash alleging that he needed badly the sum of P4,000
represented by the check, but could not withdraw it from the bank, it being then
already closed; that in view of this request and relying upon appellant's assurance
that he had sufficient funds in the blank to meet Exhibit A, and because they used
to borrow money from each other, even before the war, and appellant owns a hotel
and restaurant known as the North Bay Hotel, said complainant delivered to him, on
the same date, the sum of P4,000 in cash; that despite repeated efforts to notify
him that the check had been dishonored by the bank, appellant could not be located
any-where, until he was summoned in the City Fiscal's Office in view of the
complaint for estafa filed in connection therewith; and that appellant has not paid
as yet the amount of the check, or any part thereof."

Inasmuch as the findings of fact of the Court of Appeals are final, the only
question of law for decision is whether under the facts found, estafa had been
accomplished.

Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes
swindling committed "By post dating a check, or issuing such check in payment of an
obligation the offender knowing that at the time he had no funds in the bank, or
the funds deposited by him in the bank were not sufficient to cover the amount of
the check, and without informing the payee of such circumstances".

We believe that under this provision of law Ang Tek Lian was properly held liable.
In this connection, it must be stated that, as explained in People vs. Fernandez
(59 Phil., 615), estafa is committed by issuing either a postdated check or an
ordinary check to accomplish the deceit.
It is argued, however, that as the check had been made payable to "cash" and had
not been endorsed by Ang Tek Lian, the defendant is not guilty of the offense
charged. Based on the proposition that "by uniform practice of all banks in the
Philippines a check so drawn is invariably dishonored," the following line of
reasoning is advanced in support of the argument:

. . . When, therefore, he (the offended party ) accepted the check (Exhibit A) from
the appellant, he did so with full knowledge that it would be dishonored upon
presentment. In that sense, the appellant could not be said to have acted
fraudulently because the complainant, in so accepting the check as it was drawn,
must be considered, by every rational consideration, to have done so fully aware of
the risk he was running thereby." (Brief for the appellant, p. 11.)

We are not aware of the uniformity of such practice. Instances have undoubtedly
occurred wherein the Bank required the indorsement of the drawer before honoring a
check payable to "cash." But cases there are too, where no such requirement had
been made . It depends upon the circumstances of each transaction.

Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the
order of "cash" is a check payable to bearer, and the bank may pay it to the person
presenting it for payment without the drawer's indorsement.

A check payable to the order of cash is a bearer instrument. Bacal vs. National
City Bank of New York (1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. De Beck
Plate Glass Co. (1907), 54 Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding &
Insurance Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S. W.
(2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E.,
713.

Where a check is made payable to the order of "cash", the word cash "does not
purport to be the name of any person", and hence the instrument is payable to
bearer. The drawee bank need not obtain any indorsement of the check, but may pay
it to the person presenting it without any indorsement. . . . (Zollmann, Banks and
Banking, Permanent Edition, Vol. 6, p. 494.)

Of course, if the bank is not sure of the bearer's identity or financial solvency,
it has the right to demand identification and /or assurance against possible
complications, — for instance, (a) forgery of drawer's signature, (b) loss of the
check by the rightful owner, (c) raising of the amount payable, etc. The bank may
therefore require, for its protection, that the indorsement of the drawer — or of
some other person known to it — be obtained. But where the Bank is satisfied of the
identity and /or the economic standing of the bearer who tenders the check for
collection, it will pay the instrument without further question; and it would incur
no liability to the drawer in thus acting.

A check payable to bearer is authority for payment to holder. Where a check is in


the ordinary form, and is payable to bearer, so that no indorsement is required, a
bank, to which it is presented for payment, need not have the holder identified,
and is not negligent in falling to do so. . . . (Michie on Banks and Banking,
Permanent Edition, Vol. 5, p. 343.)

. . . Consequently, a drawee bank to which a bearer check is presented for payment


need not necessarily have the holder identified and ordinarily may not be charged
with negligence in failing to do so. See Opinions 6C:2 and 6C:3 If the bank has no
reasonable cause for suspecting any irregularity, it will be protected in paying a
bearer check, "no matter what facts unknown to it may have occurred prior to the
presentment." 1 Morse, Banks and Banking, sec. 393.

Although a bank is entitled to pay the amount of a bearer check without further
inquiry, it is entirely reasonable for the bank to insist that holder give
satisfactory proof of his identity. . . . (Paton's Digest, Vol. I, p. 1089.)

Anyway, it is significant, and conclusive, that the form of the check Exhibit A was
totally unconnected with its dishonor. The Court of Appeals declared that it was
returned unsatisfied because the drawer had insufficient funds — not because the
drawer's indorsement was lacking.

Wherefore, there being no question as to the correctness of the penalty imposed on


the appellant, the writ of certiorari is denied and the decision of the Court of
Appeals is hereby affirmed, with costs.

Moran, C. J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-14883 July 31, 1963

NARCISA BUENCAMINO, AMADA DE LEON-ERAÑA, ENCARNACION DE LEON and BIENVENIDO B.


ERAÑA, petitioners-appellants,
vs.
C. HERNANDEZ, as City Treasurer of Quezon City,
JAIME HERNANDEZ, as Secretary of Finance and
LAND TENURE ADMINISTRATION, respondents-appellees.

N. S. Sison for petitioners-appellants.


Revilla, Lustre and Agloro for respondents-appellees.

REGALA, J.:

This is an appeal from the order of the Quezon City Court of First Instance, Judge
Nicasio Yatco, presiding, dismissing the petition for mandamus filed by the herein
petitioners to compel the respondent City Treasurer of Quezon City to accept
Government negotiable land certificates as payment for land taxes.

The respondent City Treasurer accepts the following statement of facts set forth in
the petitioners' brief:

On May 11, 1957, the Land Tenure Administration, LTA for short, purchased from the
petitioners Narcisa Buencamino, Amada de Leon-Eraña, and Encarnacion de Leon, and
other members of the de Leon family their hacienda in Talavera, Nueva Ecija for a
total consideration of P2,746,000.00. For the purpose, a Memorandum Agreement was
executed on the said date which expressly declared that the LTA was purchasing the
hacienda upon petition of the tenants thereof in accordance with Republic Act No.
1400, otherwise known as the Land Reform Act of 1955.

The parties to the sale agreed that of the full price of P2,746,000.00, 50% or
P1,373,000.00 was to be paid in cash and the balance in negotiable land
certificates. Below is a reproduction of one such negotiable land certificate
typical of and identical to all the other issued by the LTA to the petitioners.

AMOUNT: P10,000.00

NEGOTIABLE LAND CERTIFICATE


THE GOVERNMENT OF THE REPUBLIC OF
THE PHILIPPINES

is indebted unto the


BEARER

in the sum of TEN THOUSAND PESOS. This certificate is issued in accordance with the
provisions of Section 9, Republic Act No. 1400, entitled "AN ACT DEFINING A LAND
TENURE POLICY, PROVIDING FOR AN INSTRUMENTALITY TO CARRY OUT THE POLICY, AND
APPROPRIATING FUNDS FOR ITS IMPLEMENTATION", approved September 9, 1955, and is due
and payable to BEARER on demand and upon presentation at the Central Bank of the
Philippines without interest, if presented for payment within five years from the
date of issue; with interest at the rate of 4 per centum per annum, if presented
for payment after five years from the date of issue; with interest at the rate of
4-½ per centum per annum, if presented for payment after ten years from the date of
issue; and, with interest at the rate of 5 per centum per annum, if presented for
payment after fifteen years from the date of issue. Both principal and interest are
payable by the Treasurer of the Philippines, through the Central Bank of the
Philippines, in legal tender currency of the Philippines.

This land certificate is part of the total negotiable land certificates issued and
limited to the aggregate principal sum of SIXTY MILLION PESOS a year, to be issued
during the first two years from September 9, 1955 when Republic Act No. 1400 was
approved, and P30 million each year during the succeeding years, for the purchase
of private agricultural lands for resale at cost to bona-fide tenants or occupants,
or, in the case of estates abandoned by the owners for the last five years, to
private individuals who will work the lands themselves and who are qualified to
acquire or own lands, but who do not own more than six hectares of lands in the
Philippines.

Manila, Philippines, August 9, 1957.

Encashment of this certificate may not be made until after five (5) years from the
date of execution of the Deed of Sale of Hacienda de Leon, pursuant to the
conditions under Paragraph "b" of the Memorandum Agreement executed between the
Land Tenure Administration and the owners of Hacienda de Leon on May 11, 1957,
acknowledged before Marcelo Lagramada, Notary Public for Manila, as Doc. No. 324,
Page 66, Book No. 6, Series of 1957.

(Sgd.) JUAN CAÑIZARES


Registrar of the Central
Bank of the Philippines

(Sgd.) CARLOS P. GARCIA


President of the Phil.

(Sgd.) VICENTE GELLA


Treasurer of the Phil.

Date of issue: August 9, 1957


Recorded: Illegible
Examined: Illegible
The condition in the certificate regarding its encashment only after the lapse of
five years from the date of execution of the Deed of Sale of Hacienda de Leon was
adopted or taken from the Memorandum Agreement of May 11, 1957 first mentioned
above and which was subsequently ratified by the Cabinet and the President. As
stipulated in the said document, the condition reads:

B. That the mode of payment shall be 50% in cash and 50% in negotiable land
certificates except that the encashment of the said negotiable land certificate may
not be made until after five (5) years from the date of the execution of the deed
of sale with the payments of the corresponding interest, said negotiable land
certificate may be applied and used for all the purposes authorized by Republic Act
No. 1400 and other pertinent laws on the matter within the said period of five (5)
years; (page 3, Memorandum Agreement).1äwphï1.ñët

Subsequently, this stipulation was incorporated and clarified in the Absolute Deed
of Sale executed to formalize the terms contained in the Memorandum Agreement.
Under the deed of sale, dated July 31, 1957, the above condition was —

That the VENDORS shall not, however, within five (5) years, present for encashment
the negotiable land certificates amounting to ONE MILLION THREE HUNDRED SEVENTY
THREE THOUSAND PESOS (P1,373,000.00) but nevertheless, shall be authorized to use
the same for payment of land taxes or obligations due and payable in favor of the
Government and such other uses or purposes provided for by Section 10 of Republic
Act No. 1400 within the said period of five (5) years from this date. (page 4,
Absolute Deed of Sale)

Doubtless, therefore, the aforecited provisions of the Memorandum Agreement and the
Absolute Deed of Sale in relation to the condition in the negotiable land
certificate were mere implementation of Section 10 of Republic Act No. 1400, which
provided:

Sec. 10. Uses of certificates. — Negotiable land certificates maybe used by the
holder thereof for any of the following purposes:

x x x x x x x x x

(3) Payment of all tax obligations of the holder thereof, or of any debt or
monetary obligation of the holder to the Government or any of its instrumentalities
or agencies, including the Rehabilitation Finance Corporation and the Philippine
National Bank; Provided, however, That payment of indebtedness shall not be less
than twenty per centum of the total indebtedness of the debtor; and .

x x x x x x x x x

Availing themselves of what they considered was their contractual and statutory
rights under the certificate, the petitioners presented two of them to the
respondent City Treasurer in payment of certain 1957 realty tax obligations to
Quezon City. The respondent Treasurer refused to accept the same and claimed that
as per the opinion rendered by the Secretary of Finance, it was discretionary on
his part, the respondent Treasurer, to accept or reject the said certificates. And,
invoking his discretion in the premises, the respondent Treasurer explained that he
could not accept the certificates offered as Quezon City was then in great need of
funds.

The petitioners were thus obliged to settle in cash the 1957 tax obligation
aforementioned. Subsequently, however, the petitioners tendered once more the same
certificates in payment of their 1958 realty taxes and the respondent Treasurer
similarly rejected the tender. As a result, the petitioners filed the instant
mandamus proceedings with the Court of First Instance of Quezon City.
To the above petition, the LTA filed a timely answer sustaining the petitioners'
stand. The Secretary of Finance, represented by the Solicitor General, also filed
an answer, which argued that he was not a necessary party to the case as he was not
the officer with the duty of collecting taxes.

The respondent Treasurer did not file an answer. Instead, represented by the City
Attorney's Office, he filed a Motion to Dismiss on the ground that the petition
filed to state a cause of action.

The Motion to Dismiss discussed various arguments for the position of the
respondent that he could not be compelled to accept the certificates. In effect,
however, they resolve themselves into the single question of whether or not the
said certificates where drawn payable on demand as required by Section 9 of
Republic Act 1400.

The respondent Treasurer contends that the certificates in question were not issued
strictly in accordance with the provisions of Republic Act No. 1400 because while
Section 9 of that Act inquires that "negotiable land certificates shall be issued
in denominations of one thousand pesos or multiples of one thousand pesos and shall
be payable to bearer on demand . . ., " the ones issue to the petitioners were
payable to bearer not on demand but, only upon the expiration of the five-year
period there in specified.

On the other hand, the petitioners contend that although the certificates issued
could not really be encashed within the period therein mentioned, they could,
however, still be used for the settlement of tax liabilities at any time after
their issue in accordance with Section 10 of the same Act. The petitioners maintain
that the 5-year restriction against encashment referred merely and exclusively to
the time when the certificates may be converted to cash and not anymore to the
utility of the said instruments as substitutes for tax obligations.

The court a quo sustained the position of the respondent Treasurer and dismissed
the suit for mandamus. Thus, this appeal.

Although the issue raised by the instant appeal has already been rendered moot, by
time, it is the sense of this Court that a brief discussion of the point of
controversy will favor the best interest of justice as well as of the parties
hereto.

We hold the refusal of the respondent Treasurer to accept the land certificates to
be legally justified. They failed to comply with the requirements of Republic Act
No. 1400.

Under the above-mentioned law, the land certificates "shall be payable to bearer on
demand." (Section 9) The one issued, however, were payable to bearer only after the
lapse of five years from a given period. Obviously then, the requirement that they
should be payable on demand was not met since an instrument payable on demand is
one which (a) is expressed to be payable on demand, or at sight, or on
presentation; or (b) expresses no time for payment (Sec. 7, Negotiable Instruments
Law) The 5-year period within which the certificates could not be encashed was an
expression of the time for payment contrary to paragraph (b) of the last law cited.

The petitioners maintain, as already indicated above, that although the questioned
certificates may not really be payable on demand, they may nevertheless be used for
the payment of realty obligations to the Government because of Section 10 of
Republic Act No. 1400. As expressed by the petitioners, "as to Government agencies
and instrumentalities, the certificate is payable to bearer on demand during that
first five-year period."
There is no merit in the above assertion. It is a conclusion unsupported by any
provision of law. While Section 10 of Republic Act No. 1400 expressly authorizes
the use of the said certificates for the "payment of all tax obligations of the
holder thereof," the said section can only have meant such certificates as were
issued strictly in accordance with Section 9 of the same Act, i.e., that the
instrument is payable on demand. And, as discussed above, the certificates issued
were not payable on demand, then the benefits of Section 10 cannot be properly
invoked.

IN VIEW OF ALL THE FOREGOING, the order appealed from is hereby affirmed, with
costs against the appellants.

Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera,


Paredes and Dizon, JJ., concur.
Padilla, J., took no part.
Makalintal, J., reserves his vote.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-14883 July 31, 1963

NARCISA BUENCAMINO, AMADA DE LEON-ERAÑA, ENCARNACION DE LEON and BIENVENIDO B.


ERAÑA, petitioners-appellants,
vs.
C. HERNANDEZ, as City Treasurer of Quezon City,
JAIME HERNANDEZ, as Secretary of Finance and
LAND TENURE ADMINISTRATION, respondents-appellees.

N. S. Sison for petitioners-appellants.


Revilla, Lustre and Agloro for respondents-appellees.

REGALA, J.:

This is an appeal from the order of the Quezon City Court of First Instance, Judge
Nicasio Yatco, presiding, dismissing the petition for mandamus filed by the herein
petitioners to compel the respondent City Treasurer of Quezon City to accept
Government negotiable land certificates as payment for land taxes.

The respondent City Treasurer accepts the following statement of facts set forth in
the petitioners' brief:

On May 11, 1957, the Land Tenure Administration, LTA for short, purchased from the
petitioners Narcisa Buencamino, Amada de Leon-Eraña, and Encarnacion de Leon, and
other members of the de Leon family their hacienda in Talavera, Nueva Ecija for a
total consideration of P2,746,000.00. For the purpose, a Memorandum Agreement was
executed on the said date which expressly declared that the LTA was purchasing the
hacienda upon petition of the tenants thereof in accordance with Republic Act No.
1400, otherwise known as the Land Reform Act of 1955.

The parties to the sale agreed that of the full price of P2,746,000.00, 50% or
P1,373,000.00 was to be paid in cash and the balance in negotiable land
certificates. Below is a reproduction of one such negotiable land certificate
typical of and identical to all the other issued by the LTA to the petitioners.

AMOUNT: P10,000.00

NEGOTIABLE LAND CERTIFICATE


THE GOVERNMENT OF THE REPUBLIC OF
THE PHILIPPINES

is indebted unto the


BEARER

in the sum of TEN THOUSAND PESOS. This certificate is issued in accordance with the
provisions of Section 9, Republic Act No. 1400, entitled "AN ACT DEFINING A LAND
TENURE POLICY, PROVIDING FOR AN INSTRUMENTALITY TO CARRY OUT THE POLICY, AND
APPROPRIATING FUNDS FOR ITS IMPLEMENTATION", approved September 9, 1955, and is due
and payable to BEARER on demand and upon presentation at the Central Bank of the
Philippines without interest, if presented for payment within five years from the
date of issue; with interest at the rate of 4 per centum per annum, if presented
for payment after five years from the date of issue; with interest at the rate of
4-½ per centum per annum, if presented for payment after ten years from the date of
issue; and, with interest at the rate of 5 per centum per annum, if presented for
payment after fifteen years from the date of issue. Both principal and interest are
payable by the Treasurer of the Philippines, through the Central Bank of the
Philippines, in legal tender currency of the Philippines.

This land certificate is part of the total negotiable land certificates issued and
limited to the aggregate principal sum of SIXTY MILLION PESOS a year, to be issued
during the first two years from September 9, 1955 when Republic Act No. 1400 was
approved, and P30 million each year during the succeeding years, for the purchase
of private agricultural lands for resale at cost to bona-fide tenants or occupants,
or, in the case of estates abandoned by the owners for the last five years, to
private individuals who will work the lands themselves and who are qualified to
acquire or own lands, but who do not own more than six hectares of lands in the
Philippines.

Manila, Philippines, August 9, 1957.

Encashment of this certificate may not be made until after five (5) years from the
date of execution of the Deed of Sale of Hacienda de Leon, pursuant to the
conditions under Paragraph "b" of the Memorandum Agreement executed between the
Land Tenure Administration and the owners of Hacienda de Leon on May 11, 1957,
acknowledged before Marcelo Lagramada, Notary Public for Manila, as Doc. No. 324,
Page 66, Book No. 6, Series of 1957.

(Sgd.) JUAN CAÑIZARES


Registrar of the Central
Bank of the Philippines

(Sgd.) CARLOS P. GARCIA


President of the Phil.

(Sgd.) VICENTE GELLA


Treasurer of the Phil.
Date of issue: August 9, 1957
Recorded: Illegible
Examined: Illegible

The condition in the certificate regarding its encashment only after the lapse of
five years from the date of execution of the Deed of Sale of Hacienda de Leon was
adopted or taken from the Memorandum Agreement of May 11, 1957 first mentioned
above and which was subsequently ratified by the Cabinet and the President. As
stipulated in the said document, the condition reads:

B. That the mode of payment shall be 50% in cash and 50% in negotiable land
certificates except that the encashment of the said negotiable land certificate may
not be made until after five (5) years from the date of the execution of the deed
of sale with the payments of the corresponding interest, said negotiable land
certificate may be applied and used for all the purposes authorized by Republic Act
No. 1400 and other pertinent laws on the matter within the said period of five (5)
years; (page 3, Memorandum Agreement).1äwphï1.ñët

Subsequently, this stipulation was incorporated and clarified in the Absolute Deed
of Sale executed to formalize the terms contained in the Memorandum Agreement.
Under the deed of sale, dated July 31, 1957, the above condition was —

That the VENDORS shall not, however, within five (5) years, present for encashment
the negotiable land certificates amounting to ONE MILLION THREE HUNDRED SEVENTY
THREE THOUSAND PESOS (P1,373,000.00) but nevertheless, shall be authorized to use
the same for payment of land taxes or obligations due and payable in favor of the
Government and such other uses or purposes provided for by Section 10 of Republic
Act No. 1400 within the said period of five (5) years from this date. (page 4,
Absolute Deed of Sale)

Doubtless, therefore, the aforecited provisions of the Memorandum Agreement and the
Absolute Deed of Sale in relation to the condition in the negotiable land
certificate were mere implementation of Section 10 of Republic Act No. 1400, which
provided:

Sec. 10. Uses of certificates. — Negotiable land certificates maybe used by the
holder thereof for any of the following purposes:

x x x x x x x x x

(3) Payment of all tax obligations of the holder thereof, or of any debt or
monetary obligation of the holder to the Government or any of its instrumentalities
or agencies, including the Rehabilitation Finance Corporation and the Philippine
National Bank; Provided, however, That payment of indebtedness shall not be less
than twenty per centum of the total indebtedness of the debtor; and .

x x x x x x x x x

Availing themselves of what they considered was their contractual and statutory
rights under the certificate, the petitioners presented two of them to the
respondent City Treasurer in payment of certain 1957 realty tax obligations to
Quezon City. The respondent Treasurer refused to accept the same and claimed that
as per the opinion rendered by the Secretary of Finance, it was discretionary on
his part, the respondent Treasurer, to accept or reject the said certificates. And,
invoking his discretion in the premises, the respondent Treasurer explained that he
could not accept the certificates offered as Quezon City was then in great need of
funds.
The petitioners were thus obliged to settle in cash the 1957 tax obligation
aforementioned. Subsequently, however, the petitioners tendered once more the same
certificates in payment of their 1958 realty taxes and the respondent Treasurer
similarly rejected the tender. As a result, the petitioners filed the instant
mandamus proceedings with the Court of First Instance of Quezon City.

To the above petition, the LTA filed a timely answer sustaining the petitioners'
stand. The Secretary of Finance, represented by the Solicitor General, also filed
an answer, which argued that he was not a necessary party to the case as he was not
the officer with the duty of collecting taxes.

The respondent Treasurer did not file an answer. Instead, represented by the City
Attorney's Office, he filed a Motion to Dismiss on the ground that the petition
filed to state a cause of action.

The Motion to Dismiss discussed various arguments for the position of the
respondent that he could not be compelled to accept the certificates. In effect,
however, they resolve themselves into the single question of whether or not the
said certificates where drawn payable on demand as required by Section 9 of
Republic Act 1400.

The respondent Treasurer contends that the certificates in question were not issued
strictly in accordance with the provisions of Republic Act No. 1400 because while
Section 9 of that Act inquires that "negotiable land certificates shall be issued
in denominations of one thousand pesos or multiples of one thousand pesos and shall
be payable to bearer on demand . . ., " the ones issue to the petitioners were
payable to bearer not on demand but, only upon the expiration of the five-year
period there in specified.

On the other hand, the petitioners contend that although the certificates issued
could not really be encashed within the period therein mentioned, they could,
however, still be used for the settlement of tax liabilities at any time after
their issue in accordance with Section 10 of the same Act. The petitioners maintain
that the 5-year restriction against encashment referred merely and exclusively to
the time when the certificates may be converted to cash and not anymore to the
utility of the said instruments as substitutes for tax obligations.

The court a quo sustained the position of the respondent Treasurer and dismissed
the suit for mandamus. Thus, this appeal.

Although the issue raised by the instant appeal has already been rendered moot, by
time, it is the sense of this Court that a brief discussion of the point of
controversy will favor the best interest of justice as well as of the parties
hereto.

We hold the refusal of the respondent Treasurer to accept the land certificates to
be legally justified. They failed to comply with the requirements of Republic Act
No. 1400.

Under the above-mentioned law, the land certificates "shall be payable to bearer on
demand." (Section 9) The one issued, however, were payable to bearer only after the
lapse of five years from a given period. Obviously then, the requirement that they
should be payable on demand was not met since an instrument payable on demand is
one which (a) is expressed to be payable on demand, or at sight, or on
presentation; or (b) expresses no time for payment (Sec. 7, Negotiable Instruments
Law) The 5-year period within which the certificates could not be encashed was an
expression of the time for payment contrary to paragraph (b) of the last law cited.

The petitioners maintain, as already indicated above, that although the questioned
certificates may not really be payable on demand, they may nevertheless be used for
the payment of realty obligations to the Government because of Section 10 of
Republic Act No. 1400. As expressed by the petitioners, "as to Government agencies
and instrumentalities, the certificate is payable to bearer on demand during that
first five-year period."

There is no merit in the above assertion. It is a conclusion unsupported by any


provision of law. While Section 10 of Republic Act No. 1400 expressly authorizes
the use of the said certificates for the "payment of all tax obligations of the
holder thereof," the said section can only have meant such certificates as were
issued strictly in accordance with Section 9 of the same Act, i.e., that the
instrument is payable on demand. And, as discussed above, the certificates issued
were not payable on demand, then the benefits of Section 10 cannot be properly
invoked.

IN VIEW OF ALL THE FOREGOING, the order appealed from is hereby affirmed, with
costs against the appellants.

Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera,


Paredes and Dizon, JJ., concur.
Padilla, J., took no part.
Makalintal, J., reserves his vote.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-18103 June 8, 1922

PHILIPPINE NATIONAL BANK, plaintiff-appellee,


vs.
MANILA OIL REFINING & BY-PRODUCTS COMPANY, INC., defendant-appellant.

Antonio Gonzalez for appellant.


Roman J. Lacson for appellee.
Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs, Mc Donough and
Johnson; Julian Wolfson; Ross and Lawrence; Francis B. Mahoney, and Jose A.
Espiritu, amici curiae.

MALCOLM, J.:

The question of first impression raised in this case concerns the validity in this
jurisdiction of a provision in a promissory note whereby in case the same is not
paid at maturity, the maker authorizes any attorney to appear and confess judgment
thereon for the principal amount, with interest, costs, and attorney's fees, and
waives all errors, rights to inquisition, and appeal, and all property exceptions.

On May 8, 1920, the manager and the treasurer of the Manila Oil Refining & By-
Products Company, Inc., executed and delivered to the Philippine National Bank, a
written instrument reading as follows:
RENEWAL.
P61,000.00

MANILA, P.I., May 8, 1920.

On demand after date we promise to pay to the order of the Philippine National Bank
sixty-one thousand only pesos at Philippine National Bank, Manila, P.I.

Without defalcation, value received; and to hereby authorize any attorney in the
Philippine Islands, in case this note be not paid at maturity, to appear in my name
and confess judgment for the above sum with interest, cost of suit and attorney's
fees of ten (10) per cent for collection, a release of all errors and waiver of all
rights to inquisition and appeal, and to the benefit of all laws exempting
property, real or personal, from levy or sale. Value received. No. ____ Due ____

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) VICENTE SOTELO,


Manager.

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) RAFAEL LOPEZ,


Treasurer

The Manila Oil Refining and By-Products Company, Inc. failed to pay the promissory
note on demand. The Philippine National Bank brought action in the Court of First
Instance of Manila, to recover P61,000, the amount of the note, together with
interest and costs. Mr. Elias N. Rector, an attorney associated with the Philippine
National Bank, entered his appearance in representation of the defendant, and filed
a motion confessing judgment. The defendant, however, in a sworn declaration,
objected strongly to the unsolicited representation of attorney Recto. Later,
attorney Antonio Gonzalez appeared for the defendant and filed a demurrer, and when
this was overruled, presented an answer. The trial judge rendered judgment on the
motion of attorney Recto in the terms of the complaint.

The foregoing facts, and appellant's three assignments of error, raise squarely the
question which was suggested in the beginning of this opinion. In view of the
importance of the subject to the business community, the advice of prominent
attorneys-at-law with banking connections, was solicited. These members of the bar
responded promptly to the request of the court, and their memoranda have proved
highly useful in the solution of the question. It is to the credit of the bar that
although the sanction of judgement notes in the Philippines might prove of
immediate value to clients, every one of the attorneys has looked upon the matter
in a big way, with the result that out of their independent investigations has come
a practically unanimous protest against the recognition in this jurisdiction of
judgment notes.1

Neither the Code of Civil Procedure nor any other remedial statute expressly or
tacitly recognizes a confession of judgment commonly called a judgment note. On the
contrary, the provisions of the Code of Civil Procedure, in relation to
constitutional safeguards relating to the right to take a man's property only after
a day in court and after due process of law, contemplate that all defendants shall
have an opportunity to be heard. Further, the provisions of the Code of Civil
Procedure pertaining to counter claims argue against judgment notes, especially as
the Code provides that in case the defendant or his assignee omits to set up a
counterclaim, he cannot afterwards maintain an action against the plaintiff
therefor. (Secs. 95, 96, 97.) At least one provision of the substantive law,
namely, that the validity and fulfillment of contracts cannot be left to the will
of one of the contracting parties (Civil Code, art. 1356), constitutes another
indication of fundamental legal purposes.

The attorney for the appellee contends that the Negotiable Instruments Law (Act No.
2031) expressly recognizes judgment notes, and that they are enforcible under the
regular procedure. The Negotiable Instruments Law, in section 5, provides that "The
negotiable character of an instrument otherwise negotiable is not affected by a
provision which ". . . (b) Authorizes a confession of judgment if the instrument be
not paid at maturity." We do not believe, however, that this provision of law can
be taken to sanction judgments by confession, because it is a portion of a uniform
law which merely provides that, in jurisdiction where judgment notes are
recognized, such clauses shall not affect the negotiable character of the
instrument. Moreover, the same section of the Negotiable Instruments. Law concludes
with these words: "But nothing in this section shall validate any provision or
stipulation otherwise illegal."

The court is thus put in the position of having to determine the validity in the
absence of statute of a provision in a note authorizing an attorney to appear and
confess judgment against the maker. This situation, in reality, has its advantages
for it permits us to reach that solution which is best grounded in the solid
principles of the law, and which will best advance the public interest.

The practice of entering judgments in debt on warrants of attorney is of ancient


origin. In the course of time a warrant of attorney to confess judgement became a
familiar common law security. At common law, there were two kinds of judgments by
confession; the one a judgment by cognovit actionem, and the other by confession
relicta verificatione. A number of jurisdictions in the United States have accepted
the common law view of judgments by confession, while still other jurisdictions
have refused to sanction them. In some States, statutes have been passed which have
either expressly authorized confession of judgment on warrant of attorney, without
antecedent process, or have forbidden judgments of this character. In the absence
of statute, there is a conflict of authority as to the validity of a warrant of
attorney for the confession of judgement. The weight of opinion is that, unless
authorized by statute, warrants of attorney to confess judgment are void, as
against public policy.

Possibly the leading case on the subject is First National Bank of Kansas City vs.
White ([1909], 220 Mo., 717; 16 Ann. Cas., 889; 120 S. W., 36; 132 Am. St. Rep.,
612). The record in this case discloses that on October 4, 1990, the defendant
executed and delivered to the plaintiff an obligation in which the defendant
authorized any attorney-at-law to appear for him in an action on the note at any
time after the note became due in any court of record in the State of Missouri, or
elsewhere, to waive the issuing and service of process, and to confess judgement in
favor of the First National Bank of Kansas City for the amount that might then be
due thereon, with interest at the rate therein mentioned and the costs of suit,
together with an attorney's fee of 10 per cent and also to waive and release all
errors in said proceedings and judgment, and all proceedings, appeals, or writs of
error thereon. Plaintiff filed a petition in the Circuit Court to which was
attached the above-mentioned instrument. An attorney named Denham appeared pursuant
to the authority given by the note sued on, entered the appearance of the
defendant, and consented that judgement be rendered in favor of the plaintiff as
prayed in the petition. After the Circuit Court had entered a judgement, the
defendants, through counsel, appeared specially and filed a motion to set it aside.
The Supreme Court of Missouri, speaking through Mr. Justice Graves, in part said:

But going beyond the mere technical question in our preceding paragraph discussed,
we come to a question urged which goes to the very root of this case, and whilst
new and novel in this state, we do not feel that the case should be disposed of
without discussing and passing upon that question.

x x x x x x x x x

And if this instrument be considered as security for a debt, as it was by the


common law, it has never so found recognition in this state. The policy of our law
has been against such hidden securities for debt. Our Recorder's Act is such that
instruments intended as security for debt should find a place in the public
records, and if not, they have often been viewed with suspicion, and their bona
fides often questioned.

Nor do we thing that the policy of our law is such as to thus place a debtor in the
absolute power of his creditor. The field for fraud is too far enlarged by such an
instrument. Oppression and tyranny would follow the footsteps of such a diversion
in the way of security for debt. Such instruments procured by duress could shortly
be placed in judgment in a foreign court and much distress result therefrom.

Again, under the law the right to appeal to this court or some other appellate
court is granted to all persons against whom an adverse judgment is rendered, and
this statutory right is by the instrument stricken down. True it is that such right
is not claimed in this case, but it is a part of the bond and we hardly know why
this pound of flesh has not been demanded. Courts guard with jealous eye any
contract innovations upon their jurisdiction. The instrument before us, considered
in the light of a contract, actually reduces the courts to mere clerks to enter and
record the judgment called for therein. By our statute (Rev. St. 1899, sec. 645) a
party to a written instrument of this character has the right to show a failure of
consideration, but this right is brushed to the wind by this instrument and the
jurisdiction of the court to hear that controversy is by the whose object is to
oust the jurisdiction of the courts are contrary to public policy and will not be
enforced. Thus it is held that any stipulation between parties to a contract
distinguishing between the different courts of the country is contrary to public
policy. The principle has also been applied to a stipulation in a contract that a
party who breaks it may not be sued, to an agreement designating a person to be
sued for its breach who is nowise liable and prohibiting action against any but
him, to a provision in a lease that the landlord shall have the right to take
immediate judgment against the tenant in case of a default on his part, without
giving the notice and demand for possession and filing the complaint required by
statute, to a by-law of a benefit association that the decisions of its officers on
claim shall be final and conclusive, and to many other agreements of a similar
tendency. In some courts, any agreement as to the time for suing different from
time allowed by the statute of limitations within which suit shall be brought or
the right to sue be barred is held void.

x x x x x x x x x

We shall not pursue this question further. This contract, in so far as it goes
beyond the usual provisions of a note, is void as against the public policy of the
state, as such public policy is found expressed in our laws and decisions. Such
agreements are iniquitous to the uttermost and should be promptly condemned by the
courts, until such time as they may receive express statutory recognition, as they
have in some states.

x x x x x x x x x

From what has been said, it follows that the Circuit Court never had jurisdiction
of the defendant, and the judgement is reversed.

The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L.R.A. [N.
S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another well-considered
authority. The notes referred to in the record contained waiver of presentment and
protest, homestead and exemption rights real and personal, and other rights, and
also the following material provision: "And we do hereby empower and authorize the
said A. B. Farquhar Co. Limited, or agent, or any prothonotary or attorney of any
Court of Record to appear for us and in our name to confess judgement against us
and in favor of said A. B. Farquhar Co., Limited, for the above named sum with
costs of suit and release of all errors and without stay of execution after the
maturity of this note." The Supreme Court of West Virginia, on consideration of the
validity of the judgment note above described, speaking through Mr. Justice Miller,
in part said:

As both sides agree the question presented is one of first impression in this
State. We have no statutes, as has Pennsylvania and many other states, regulating
the subject. In the decision we are called upon to render, we must have recourse to
the rules and principles of the common law, in force here, and to our statute law,
applicable, and to such judicial decisions and practices in Virginia, in force at
the time of the separation, as are properly binding on us. It is pertinent to
remark in this connection, that after nearly fifty years of judicial history this
question, strong evidence, we think, that such notes, if at all, have never been in
very general use in this commonwealth. And in most states where they are current
the use of them has grown up under statutes authorizing them, and regulating the
practice of employing them in commercial transactions.

x x x x x x x x x

It is contended, however, that the old legal maxim, qui facit per alium, facit per
se, is as applicable here as in other cases. We do not think so. Strong reasons
exist, as we have shown, for denying its application, when holders of contracts of
this character seek the aid of the courts and of their execution process to enforce
them, defendant having had no day in court or opportunity to be heard. We need not
say in this case that a debtor may not, by proper power of attorney duly executed,
authorize another to appear in court, and by proper endorsement upon the writ waive
service of process, and confess judgement. But we do not wish to be understood as
approving or intending to countenance the practice employing in this state
commercial paper of the character here involved. Such paper has heretofore had
little if any currency here. If the practice is adopted into this state it ought to
be, we think, by act of the Legislature, with all proper safeguards thrown around
it, to prevent fraud and imposition. The policy of our law is, that no man shall
suffer judgment at the hands of our courts without proper process and a day to be
heard. To give currency to such paper by judicial pronouncement would be to open
the door to fraud and imposition, and to subject the people to wrongs and injuries
not heretofore contemplated. This we are unwilling to do.

A case typical of those authorities which lend support to judgment notes is First
National Bank of Las Cruces vs. Baker ([1919], 180 Pac., 291). The Supreme Court of
New Mexico, in a per curiam decision, in part, said:

In some of the states the judgments upon warrants of attorney are condemned as
being against public policy. (Farquhar and Co. vs. Dahaven, 70 W. Va., 738; 75
S.E., 65; 40 L.R.A. [N. S.], 956; Ann. Cas. [1914 A]. 640, and First National Bank
of Kansas City vs. White, 220 Mo., 717; 120 S. W., 36; 132 Am. St. Rep., 612; 16
Ann. Cas., 889, are examples of such holding.) By just what course of reasoning it
can be said by the courts that such judgments are against public policy we are
unable to understand. It was a practice from time immemorial at common law, and the
common law comes down to us sanctioned as justified by the reason and experience of
English-speaking peoples. If conditions have arisen in this country which make the
application of the common law undesirable, it is for the Legislature to so
announce, and to prohibit the taking of judgments can be declared as against the
public policy of the state. We are aware that the argument against them is that
they enable the unconscionable creditor to take advantage of the necessities of the
poor debtor and cut him off from his ordinary day in court. On the other hand, it
may be said in their favor that it frequently enables a debtor to obtain money
which he could by no possibility otherwise obtain. It strengthens his credit, and
may be most highly beneficial to him at times. In some of the states there
judgments have been condemned by statute and of course in that case are not
allowed.

Our conclusion in this case is that a warrant of attorney given as security to a


creditor accompanying a promissory note confers a valid power, and authorizes a
confession of judgment in any court of competent jurisdiction in an action to be
brought upon said note; that our cognovit statute does not cover the same field as
that occupied by the common-law practice of taking judgments upon warrant of
attorney, and does not impliedly or otherwise abrogate such practice; and that the
practice of taking judgments upon warrants of attorney as it was pursued in this
case is not against any public policy of the state, as declared by its laws.

With reference to the conclusiveness of the decisions here mentioned, it may be


said that they are based on the practice of the English-American common law, and
that the doctrines of the common law are binding upon Philippine courts only in so
far as they are founded on sound principles applicable to local conditions.

Judgments by confession as appeared at common law were considered an amicable,


easy, and cheap way to settle and secure debts. They are a quick remedy and serve
to save the court's time. They also save the time and money of the litigants and
the government the expenses that a long litigation entails. In one sense,
instruments of this character may be considered as special agreements, with power
to enter up judgments on them, binding the parties to the result as they themselves
viewed it.

On the other hand, are disadvantages to the commercial world which outweigh the
considerations just mentioned. Such warrants of attorney are void as against public
policy, because they enlarge the field for fraud, because under these instruments
the promissor bargains away his right to a day in court, and because the effect of
the instrument is to strike down the right of appeal accorded by statute. The
recognition of such a form of obligation would bring about a complete
reorganization of commercial customs and practices, with reference to short-term
obligations. It can readily be seen that judgement notes, instead of resulting to
the advantage of commercial life in the Philippines might be the source of abuse
and oppression, and make the courts involuntary parties thereto. If the bank has a
meritorious case, the judgement is ultimately certain in the courts.

We are of the opinion that warrants of attorney to confess judgment are not
authorized nor contemplated by our law. We are further of the opinion that
provisions in notes authorizing attorneys to appear and confess judgments against
makers should not be recognized in this jurisdiction by implication and should only
be considered as valid when given express legislative sanction.

The judgment appealed from is set aside, and the case is remanded to the lower
court for further proceedings in accordance with this decision. Without special
finding as to costs in this instance, it is so ordered.

Araullo, C.J., Avanceña, Villamor, Ostrand, Johns and Romualdez, JJ., concur.

Footnotes

1MEMORANDA OF "AMICI CURIAE"


Attorney Thos. L. Hartigan, of Hartigan and Welch, states:

"Though we are attorneys for two of the large banks here and keenly interested in
the introduction of any improvements that would make for simplication of procedure
and rapidity of practice, we cannot favor the introduction of confessions of
judgment in the Philippine islands. In our opinion, it would open the doors to
fraud to an extent that would more than counterbalance any advantages of its use.

"With our lack of system in recording judgments and with the practice of keeping
merchants' books in various foreign languages, there would be ample opportunity for
a debtor to make preferences by confessions of judgment which could not be
discovered by the creditors until too late and which would be nearly impossible to
set aside even when discovered in time.

"Although, as representatives of the banks, we are representing the creditor class,


we believe the introduction of confessions of judgment would ultimately cause much
more loss than benefit to that class."

Attorney Clyde A. DeWitt, of Fisher and DeWitt, states:

"There is no statutory sanction in this jurisdiction for such provisions in


negotiable instruments. Section 5 (b) of the Negotiable Instruments Law does not
constitute such sanction because (1) it merely provides that such clauses will not
affect the negotiable character of the instrument, and (2) it concludes with
language showing that the Legislature did not intend thereby to validate any
provision otherwise unlawful. The language is: 'But nothing in this section shall
validate any provision or stipulation otherwise illegal.'

"The question then is whether or not, in the absence of express legislative


sanction, such warrants of attorney are valid. There are not many American cases in
which this precise question has been considered, and in those cases in which the
question has been raised, the reasoning of the courts has been colored by the fact
that the commercial use of these warrants of attorney as security for debt was
sanctioned at common law, and the procedural statutes are held to be merely
cumulative and not in derogation of the common law remedies. We, of course, have no
such situation here.

"The cases are collected in a note to First National Bank vs. White (220 Mo., 717),
found in 16 Ann. Cas., 893, and it is there shown that in Missouri and Kansas such
provisions are held to be void as against the public policy of the State as
expressed in its laws and the decisions of its courts, while in Colorado and
Illinois their validity was upheld as a familiar common-law security not affected
by the procedural statutes. Yet it is there pointed out that in Kahn vs. Lesser (97
Wis., 217, 72 N.W., 739), the court, in referring to a judgment by confession under
warrant of attorney in a promissory note, said:

"'The judgment in this case must stand, if at all, by the authority of the statute.
The proceeding by which it was entered was outside and in derogation of the common-
law practice of courts; and the statute, as well as the proceedings under it, must
be strictly construed.'"

"In Iowa, in an early case, McClish vs. Manning (3 Green, 233), the validity of
these warrants of attorney was upheld, referring to a statute authorizing any
person to confess a judgment, by himself or his attorney. In a later decision,
Hamilton vs. Schoenberger (47 Ilowa, 385), it was expressly held that such a
provision, in a note could not be enforced in the courts of that State, and was not
authorized or contemplated by its laws. And in Tolman vs. Jansen (106 Iowa, 455),
it was held that such a provision, being void, would not affect the negotiability
of a note, even though its effect would be to make uncertain the time of payment.
"The reasoning in First National Bank vs. White, supra, is persuasive. The court
there held that these warrants of attorney are void as against the public policy of
the state on the ground, first, that their effect is to enlarge the field for
fraud; second, that under such an instrument the promissor bargains away his right
to his day in court; third, that the effect of the instrument is to strike down the
right to appeal accorded by statute, and, fourth, that there was no provision for
the public recording of such an instrument if regarded as a security for a debt.

"It seems to me that on the precise grounds stated in the White case, these
warrants of attorney should be held void as against public policy in this
jurisdiction. If given effect, they bargain away the jurisdiction of the courts to
try and determine the liability of the maker of the note on its merits. To uphold
them would be to facilitate the operations of usurers, the collection of gambling
debts, and would make difficult, if not impossible under our procedure, the setting
aside of judgments entered in virtue thereof where the execution of the instrument
was obtained by fraud, duress, or where there had been an entire failure of
consideration. I can think of no advantage which would result to the commercial
world from upholding these warrants of attorney which would outweigh the foregoing
considerations."

Attorney e. Arthur Perkins, of Perkins and Kincaid, states:

"Leaving aside entirely the legal considerations involved, I feel that there is
only one answer to your inquiry, and that is, that the best interests of the
commercial life of the Philippines require the non-recognition of such a form of
judgment note. Feeling that you would want to know the reasons which impell me to
adopt such a conclusion, I will say briefly that if the Supreme Court should, by a
decision, recognize such a judgment note and thereby place the stamp of approval
upon transactions of such a nature, the entire business population of the
Philippine Islands would be justified in their future transactions with debtors in
requiring, in all instances, the execution of notes of a similar tenor, with the
consequence that the debtor would thereby be deprived, to all intents and purposes,
upon ignorant debtors. It will prove a serious drawback to the campaign being now
waged against usury.

"There is the further fear that the banks and money lenders having accounts now
outstanding will immediately require every debtor to execute that form of note and
to refuse further extensions of credit unless sit is done, which the debtor under
the stress of circumstances will be compelled to accept, amounting in effect to
duress.

"The recognition of such a form of obligation would be so revolutionary in


character as to bring about a complete reorganization of commercial customs and
practices with reference to short-term obligations.

"Having in mind that the Philippine National Bank is practically the only
institution which can assist the farmers and agriculturists, the practice of
requiring a judgment note would place the latter wholly at the mercy of the bank,
and this is stated without any reflection on the bank, but merely to point out one
of the consequent evils which will necessarily follow if the practice should
receive the high judicial sanction which a judgment of the Supreme Court would
necessarily give to it.

"Another feature which occurs to me is that where any new enterprise is being
launched, it is universally the custom for such company to arrange with some
banking institution for credit facilities, over and above the capital with which it
brings business. Should it become the custom here to require the execution of so-
called judgment notes, organizers of corporations, partnerships and the like, who
have in mind to secure additional working capital or credit facilities from banks,
will be very reluctant to put their funds into any enterprises which could be
destroyed without warning by the creditor exercising the rights which that form of
transaction would give him. This is would act therefore as a deterrent to new
enterprises and the development of industry through individual initiative and with
private funds.

"Let us take a very simple illustration of his. Suppose that you and I should form
a partnership, with a capital of P50,000 to buy hemp and , in connection with our
business, we went to some banking institution for the purpose of securing credit
facilities, as is customary, in the conduct of our business. Let us then suppose
that the bank, taking into consideration the capital which we ourselves had
furnished and our standing in the community, was willing to allow us a credit in
the further sum of P50,000 upon our signing a so-called judgment note. Would not
you and I consider a long time before we would so far obligate ourselves as to
place it in the power of the bank to send their attorney over to court, upon the
least provocation or at the first unfavorable rumor, and to confess judgment in our
names, which would permit the sheriff to close us out without even an opportunity
to be heard?

"The sum and substance of the whole proposition is that such a practice is contrary
to good morals."

Attorney David C. Johnson, of Gibbs, McDonough and Johnson, states:

"It seems that under the common law a confession of judgment was only allowable by
the defendant himself, either before or after appearance and answer. The confession
of judgment by warrant of attorney is a statutory development (15 R.C.L., 656, 657;
17 Am. and Eng. Encyc. of Law [2d ed.], 765; Pl. and Pr., 973-975; Masson vs. Ward,
80 Vt., 290; 130 A. S. R., 987,988).

"The procedure contemplated in the note quoted in your letter is contrary to that
contemplated in our code of procedure, which gives to all defendants an opportunity
at least to be heard. An action on the note in question could be so presented that
the defendant would never be summoned or notified, since an appearance and
confession of judgment might be filed simultaneously. We believe that this
procedure should not be recognized in this jurisdiction by implication, but should
have legislative sanction with the rights of the defendant amply safeguarded. We
believe that section 5 of Act No. 2031 does not of itself sanction any of the acts
mentioned in that section, but is only a statement regarding the negotiable
character of the instrument. Subsection A of section 5 states that the authority to
sell collateral security does not affect negotiability. As we understand the
decision of the Supreme Court in the case of Mahoney vs. Tuason(39 Phil., 952), the
creditor in this jurisdiction is not authorized by law to sell collateral security
except in the manner provided in section 14 of Act No. 1508. This would seem to
reinforce our opinion.

"There are some favorable features of a judgment note or warrant for confession of
judgment, but we believe that there are many objections which outweigh any of the
advantages. Forgery and usury are more prevalent in these Islands than in the
United States. The sanctioning of this procedure would add an additional weapon to
the money lender who desires to overreach his debtor.

"We have delayed answering your letter in order that we might consult our Mr.
Gibbs, who returned from Baguio yesterday.

"The foregoing is the consensus of opinion of the member of this firm."

Attorney Julian Wolfson states:


"It is assumed that the only question propounded is :

"'Admitting that there may be some doubt, as to a correct solution, which solution,
the recognition of a confession of judgment, or a non-recognition of a confession
of judgment, would be for the best interest of the commercial life of the
Philippines? and that no opinion is required upon the incidental questions
previously asked, as same have already been determined by an examination of such
authorities as: 23 Cyc., pp. 699, 701-2-3-5-6-7, 723-5; 6 C. J., pp. 645-6 (Notes
35 & 42); 8 C. J., p. 128 (Notes 43-47); 12 C. J., p. 418 (Note 37); and such
leading textbooks as 'Brannan's Negotiable Instruments Law' and 'Selover on
Negotiable Instruments.' "Everyone is entitled to 'his day in court.' This
right may be waved after an opportunity has been given to exercise the right, but
must not and cannot be taken away before an opportunity has been given to exercise
the right.

"The ordinary ship's bill of lading and the ordinary fire and marine insurance
policy are generally printed on forms prepared by the carrier and the insurer
respectively, and generally contain a clause making it a condition precedent to the
institution of an action to first submit the matter to a board of arbitration. The
Supreme Court has never recognized this clause. The reasons are stated in the
opinions. Once submitted to arbitration, then another question is raised.

"Special defenses to written instruments are common. Need we do more than cite the
following cases: Maulini vs. Serrano (28 Phil., 640); Henry W. Peabody and Co. vs.
Bromfield and Ross (38 Phil., 841); Cuyugan vs. Santos (34 Phil., 100; 39 Phil.,
970).

"If the judgment note (this term is used throughout for brevity and as it is the
recognized term) is to be recognized, what chance has defendant of defending as did
the defendants in the above cited cases? Non!

"Often a promissory note is a mere formality taken by a bank as evidence of


indebtedness, while the real indebtedness may be for a superior or inferior amount
incurred by way of overdraft, letters of credit outstanding, acceptances to mature,
or a thousand other forms of banking credit. Such "judgment notes" are generally
made payable on demand. In the case at bar, the note is made payable on demand. The
real indebtedness may be partially paid, or the liquidation may be going along too
slow to suit the bank and then use is made of the judgment note. The defendant
might have perfect defense except for the judgment note. Would not article 1269 of
the Civil Code here apply?

"The 'judgment notes,' is not once in a thousand times signed at the time of
receiving money from the bank. The indebtedness represented thereby is incurred in
prior transactions, the obligation became past due and the bank, as a forcible
measure, produces one of these 'judgment notes,' when the debtor is absolutely
helpless, and says 'Sign on the dotted line' and the debtor has no option, he
signs. The minds of the parties never met. The debtor owes the money, knows that
the bank must have evidence of the indebtedness to pass the auditors and the debtor
further realizes he must accept that bank's dictation, because if he declines, he
is liable to immediate ruin, or if not that, he will never get further
accommodation from the bank. He does not realize, even if he knows, what is meant
by a 'judgment note.' Again, would not article 1269 of the Civil Code here apply?

"Just a few months ago there was a suit instituted by a local bank for a large sum
of money, based on a written instrument which, on its face, seemed absolute.
Special defenses were pleaded, setting up that the instrument did not express the
real understanding of the parties and the real understanding was set up. The
special defenses were fully proved and the lower court dismissed the bank's suit.
The bank did not even attempt to appeal to the Supreme Court (See Cause No. 18239
of the Docket of the Court of First Instance of Manila). Suppose the instrument
sued on had contained a clause of confession of judgment, what chance would
defendant have had to prove his defense? None!

"Let us go a step further and see where this leads us. A is a dealer in hardware
and sells B a bill of goods. A prints a form, which he has B to sign, in which B
acknowledges receipt of the goods and in consideration thereof premises to pay A
and "a confession of judgment" clause is inserted. The goods turn out entirely
different from those ordered and invoiced. B refuses to pay. A sues on his
"judgment note." What change has B? None!

"Very often a promissory note is only one of a series of documents given as


security for the debt. What about considering the other documents which bear on the
transaction?

"A bank may have made certain advances and may have undertaken to make more, but
fails to do so, to the damage and prejudice of debtor. Let us assume that the bank
agreed to advance several hundred thousand pesos in installments of P60,000 each,
and had advanced only the first installments, taking a "judgment note" for said
first installment, and had failed to advance further, to the damage of the debtor.
What would become of section 97 of the Code of Civil Procedure? How would debtor be
able to exercise his right of counterclaim? Was it ever contemplated at the time of
signing the judgment note that the debtor would not only waive defense, but
absolutely shut himself out of court, as he would, according to section 97 above
cited, on his counterclaim? Yet again, would not article 1269 of the Civil Code
here apply?

"We dare not attempt to elaborate on what would happen in the provinces of the
Philippines should a "judgment note" be held valid.

"What about the Usury Law? How could a defense be offered there? The usurious rate
might not appear on the face of the "judgment note," but it may be there all the
same.

"Examples could be multiplied until the very absurdity of the proposition would be
clearly seen, even by a blind man.

"Of what possible benefit would the recognition of a "judgment note" serve "the
best interest of the commercial life of the Philippines? None! An honest creditor
is willing to let his debtor have his day in court and is willing to prove to the
court his case. It might take slightly longer to go through with a trial, but that
cannot be considered a set-back. But, on the other hand, a dishonest creditor would
take unfair advantage of a "judgment note" and would use it to the utmost to harass
and take advantage of the poor and helpless debtor. The real consequences likely,
in fact sure, to arise from such recognition are horrible beyond words to
contemplate.

"There can be but one answer to the proposition and that is: The non-recognition of
a confession of judgment would be for the best interests of the commercial life of
the Philippines."

Attorney J. G. Lawrence, of Ross and Lawrence, states:

"We are aware of no expression of our Legislature or courts which would indicate
that confessions of judgment under powers given in a promissory note are contrary
to public policy. This action was regularly brought in accordance with the
provisions of the Code of Civil Procedure and the defendant served with process.
The answer, confessing judgment, was filed in strict accordance with the powers
contained in the note — a power coupled with an interest which defendant would be
estopped of denying. We think that no express legal sanction is necessary to
legalize such a proceeding.

"On the question of what ought to be the public policy of the Philippines, we hold
quite a different opinion. While the use of judgment notes might in some cases
expedite the collection of just debts, we believe that under conditions as exist
here, their use should be discouraged. The lend themselves easily to fraud in the
hands of friends of a dishonest debtor, and to extortion in the hands of usurers
who are already too well equipped with the pacto de retro.

"While we believe that the position of the bank is sound legally, we should be very
glad to be proven mistaken."

Attorney Francis B. Mahoney, of the Philippine Trust Company, states:

"I have not gone into the law and cases, except to take a glance at the subject of
judgments in Volume 15 of Ruling Case Law. However, the reasons indicated on page
651 thereof are significant.

"Unquestionably, if our Legislature provided in unmistakable terms for confession


of judgment as herein indicated, the validity and constitutionality of the
enactment might be questioned as failing to provide those constitutional safeguards
of taking a man's property only after a day in court and after the due process of
law.

"This conclusion is stronger — a fortiori — where the enacting provision — if such


section 5 of Act. No. 2031 may be called — is of a lefthanded nature, apparently
relating only to negotiability — incidentally thus answering here your first
inquiry. Whatever legal principles there might be in favor of recognizing a
confession of judgment — for example, the matter of expediency — stronger and more
vital principles oppose such recognition.

"By refusing to recognize confession of judgment under existing statutes or under


general legal principles, at the worst phase from the point of view of the
plaintiff bank, there would result only possible delay, costs and attorney's fees,
which, after all, are only passed on to the clients of the bank in the shape of
interests, charges. etc. If the bank has a meritorious case, the judgment is
ultimately certain as courts.

"If the defendant debtor has any defense of merit, he is given an opportunity to
present it, as, for example, in the matter of usury so common, so difficult to
uncover an such an unscrupulous rival of legitimate banking, the courts may keep
their doors open to the equities of each individual case. Whereas, if defendant,
who theoretically may allege fraud an who practically has great difficulty in
proving it, must rely upon a defense of fraud, he has little chance and the doors
of the court are closed to any other defense.

"In the final analysis, the matter simmers down to: 1. Possible delay in judgment
with costs, etc. 2. Certain justice in the end. 3. The eyes and doors of courts
open to the equities of each individual case. 4. Equality before the law,

or

(a) Expediting judgment. (b) Defendant debtor practically kept out of court by
additional expense and difficulty in securing a hearing. (c) Putting a strong
weapon in the hands of unscrupulous persons and taking the strength necessary to
wield this weapon from the courts.
"At first glance, if a debtor signs a document throwing away his right to be heard,
the average man has a feeling such debtor deserves to suffer the consequences. If
that were the entire story, probably he should. But what man, needing money badly
enough — facing strenuous necessity — will not in the circumstances be inclined to
look on the cheerful side-to sign and get the money, letting the future take care
of itself? Such is the frailty of human nature. Then, as the usual thing, the rich
and powerful can take care of themselves, and it is usually others who have need of
courts, just laws and liberal interpretation of them.

"No doubt, banks would favor expediting judgments against their debtors, other
things being equal. And no doubt, additional delay in courts and the incidental
costs thereof will be borne by the clients of the bank. But sound banking is not
established and enhanced by harsh law which put strong weapons in powerful hands.
Contented peoples, safe laws and sound banking usually go hand in hand."

Professor Jose A. Espiritu, of the University of the Philippines, states:

"Permit me to cite first of all the authorities that I have gathered concerning the
principal question at issue in the case mentioned in your letter, namely, 'The
Effect and Validity of Confession of Judgement in the Philippines.'

"1. Confession of judgment has been defined as "a voluntary submission to the
jurisdiction of the court, giving by consent and without the service of process,
what could otherwise be obtained by summons and complaint, and other formal
proceedings, an acknowledgment of indebtedness, upon which it is contemplated that
a judgment may and will be rendered." (8 Cyc., pp. 563, 564.)

"2. As to the general effects of confession of judgment, the following statements


may be mentioned: 'A warrant to confess judgment does not destroy the negotiability
of the note. Such a note is commonly called a "judgement note." Decisions to the
contrary in the States where the Negotiable Instruments Law is now in force are
abrogated thereby, since it expressly provides that the negotiable character of an
instrument otherwise negotiable is not affected by a provision which authorizes a
confession of judgment, if the instrument is not paid at maturity. However, this
statutory provision does not apply to stipulations for the confession of judgment
"prior" to maturity.' (8 C.J., p. 128, sec. 222.)

"3. Nature of Requisites. "A judgment may be rendered upon the confession of
defendant, either in an action regularly commenced against him by the issuance and
service of process, in which case the confession may be made by his attorney of
record, or, without the institution of a suit, upon a confession by defendant in
person or by his attorney in fact. It implies something more than a mere admission
of a debt to plaintiff; in addition, it is defendant's consent that a judgment
shall be entered against him. . . . ." (23 cyc., 699.)

"4. Statutory Provisions, "Statutes regulating the confession of judgments without


action, or otherwise than according to the course of the common law, are strictly
construed, and a strict compliance with their provisions must be shown in order to
sustain the validity of the judgment." (Chapin vs. Tompson, 20 Cla., 681.) "And
this applies also to statutory restriction upon the right to confess judgment, as
that authority to confess judgment shall not be given in the same instrument which
contains the promise or obligation to pay the debt, or that such confession shall
not be authorized by any instrument executed prior to suit brought." (23 Cyc., 699,
700.)

"5. Warrant or Power of Attorney — Validity and Necessity. 'A judgment by


confession may be entered upon a written authority, called a warrant or letter of
attorney, by which the debtor empowers an attorney to enter an appearance for him,
waive process, and confess judgment against him for a designated sum, except where
this method of proceeding is prohibited by statute. The warrant as the basis of
judgment is generally required to be placed on file in the clerk's office, and no
judgment can be so entered until it is so filed.' (23 Cyc., 703.)

"6. Requisites and Sufficiency. 'A warrant or power of attorney to confess


judgement should be in writing and should conform to the requirements of the
statute in force at the time of its execution, although in the absence of specific
statutory directions it is sufficient, without much regard to its form, if it
contains the essential of a good power and clearly states its purpose. It must be
signed by the person against whom the judgment is to be entered . . . .' (23 Cyc.,
704.)

"The above quoted authorities are among the various authorities I found bearing on
the question at issue. As it can be readily seen none of them decides squarely and
definitely the questions propounded in your letter. One thing, however, seems to be
clear, from the very provision of section 5 (b) of the Negotiable Instruments Law
and from the quotation No. 2 of this letter, that a provision in a note or bill of
exchange authorizing a confession of judgment in default of payment at its maturity
has particular reference, in so far as Act No. 2031 is concerned, only to the
negotiable character of an instrument. I do not believe that the Legislature had
the intention in passing the said Act No. 2031 to introduce in the Philippines a
new practice in our Remedial Law, namely, that of confession of judgment, which is
purely procedural in nature.

"Now as to the second question, to wit: 'Does the silence of the Code of Civil
Procedure on the subject mean that a confession of judgement cannot be recognized
in this jurisdiction, or can a judgment by confession be imported into the
Philippines under general legal principles?' Before answering this question
attention is respectfully called to the quotation No. 4 of this letter, which
expressly provides that statutes regulating confession of judgments must be
strictly construed and their provisions strictly complied with to sustain the
validity of judgments rendered under such statutes. Now it being admitted that
there is no express provision in our Code of Civil Procedure authorizing or
sanctioning this mode of practice in this jurisdiction, and consequently there are
no regulations provided to be followed in this particular remedy, I am therefore of
the opinion that confession of judgment should not be deemed as imported in the
Philippines under the general legal principles. The remedy itself is a most summary
one, and when the defendant-debtor, instead of admitting or allowing a judgment be
taken against him, presents his appearance and answers the complaint filed against
him, it seems that the trial court should not render a judgement without first
hearing the evidence that the parties may wish to submit before him, for it may
happen that the defendant-debtor may have some valid or good defenses against the
plaintiff-creditor. This is especially true in the case of a counterclaim that the
defendant may have against the plaintiff as provided in sections 95 and 96 of the
Code of Civil Procedure. The same Code provides that in case of an omission to set
up his counterclaim, the defendant or his assignee loses all his right to bring
further suit on such claim. (Sec. 97, Act No. 190.)

"In answer to the last question, namely: "Admitting that there may be some doubt,
as to the correct solution, which solution, the recognition of a confession of
judgement, or the non-recognition of a confession of judgment, would be for the
best interests of the commercial life of the Philippines?" I wish first of all to
state that a confession of judgment is a quick remedy. It saves time and money as
far as the parties to the suit are concerned if the same is properly and legally
brought. It saves the court's time and the government the expense that a long
litigation entails. As to its disadvantages we may say among other things the
following: 1. It may be abused in the same way as the usurious rates of interest on
loans are now in the Philippines, because a borrower who is in great need of money
might be induced, if not actually compelled, to sign such a burdensome obligation;
2. It deprives the defendant of his day in court, and as a consequence it will
prevent him to set up and prove before the court his just claims and other lawful
defenses against the plaintiff; 3. It will create multiplicity of actions in this
jurisdiction, for if the confession of judgment has been wrongfully or unjustly
entered, the judgment debtor may start another litigation on the same subject-
matter that might have been brought before the court in case a proper trial was
formally held before the rendition of such a judgment; and 4. It does not really
hold the plaintiff who has a good cause of action against the defendant as his
proofs will surely establish his claims and consequently a judgment must
necessarily be rendered in his favor.

"From the above statements, I am of the opinion that unless proper regulations are
first duly introduced and incorporated in our remedial law, confession of
judgments, instead of resulting advantageous to our commercial life in the
Philippines, might be the sources of abuse and oppression. The very fact that
confession of judgement is almost summary and in fact a violent remedy, it should
first of all be properly regulated by statute, and those regulations must be
strictly complied with, before the court should concede to such a remedy."

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-18103 June 8, 1922

PHILIPPINE NATIONAL BANK, plaintiff-appellee,


vs.
MANILA OIL REFINING & BY-PRODUCTS COMPANY, INC., defendant-appellant.

Antonio Gonzalez for appellant.


Roman J. Lacson for appellee.
Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs, Mc Donough and
Johnson; Julian Wolfson; Ross and Lawrence; Francis B. Mahoney, and Jose A.
Espiritu, amici curiae.

MALCOLM, J.:

The question of first impression raised in this case concerns the validity in this
jurisdiction of a provision in a promissory note whereby in case the same is not
paid at maturity, the maker authorizes any attorney to appear and confess judgment
thereon for the principal amount, with interest, costs, and attorney's fees, and
waives all errors, rights to inquisition, and appeal, and all property exceptions.

On May 8, 1920, the manager and the treasurer of the Manila Oil Refining & By-
Products Company, Inc., executed and delivered to the Philippine National Bank, a
written instrument reading as follows:

RENEWAL.
P61,000.00
MANILA, P.I., May 8, 1920.

On demand after date we promise to pay to the order of the Philippine National Bank
sixty-one thousand only pesos at Philippine National Bank, Manila, P.I.

Without defalcation, value received; and to hereby authorize any attorney in the
Philippine Islands, in case this note be not paid at maturity, to appear in my name
and confess judgment for the above sum with interest, cost of suit and attorney's
fees of ten (10) per cent for collection, a release of all errors and waiver of all
rights to inquisition and appeal, and to the benefit of all laws exempting
property, real or personal, from levy or sale. Value received. No. ____ Due ____

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) VICENTE SOTELO,


Manager.

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) RAFAEL LOPEZ,


Treasurer

The Manila Oil Refining and By-Products Company, Inc. failed to pay the promissory
note on demand. The Philippine National Bank brought action in the Court of First
Instance of Manila, to recover P61,000, the amount of the note, together with
interest and costs. Mr. Elias N. Rector, an attorney associated with the Philippine
National Bank, entered his appearance in representation of the defendant, and filed
a motion confessing judgment. The defendant, however, in a sworn declaration,
objected strongly to the unsolicited representation of attorney Recto. Later,
attorney Antonio Gonzalez appeared for the defendant and filed a demurrer, and when
this was overruled, presented an answer. The trial judge rendered judgment on the
motion of attorney Recto in the terms of the complaint.

The foregoing facts, and appellant's three assignments of error, raise squarely the
question which was suggested in the beginning of this opinion. In view of the
importance of the subject to the business community, the advice of prominent
attorneys-at-law with banking connections, was solicited. These members of the bar
responded promptly to the request of the court, and their memoranda have proved
highly useful in the solution of the question. It is to the credit of the bar that
although the sanction of judgement notes in the Philippines might prove of
immediate value to clients, every one of the attorneys has looked upon the matter
in a big way, with the result that out of their independent investigations has come
a practically unanimous protest against the recognition in this jurisdiction of
judgment notes.1

Neither the Code of Civil Procedure nor any other remedial statute expressly or
tacitly recognizes a confession of judgment commonly called a judgment note. On the
contrary, the provisions of the Code of Civil Procedure, in relation to
constitutional safeguards relating to the right to take a man's property only after
a day in court and after due process of law, contemplate that all defendants shall
have an opportunity to be heard. Further, the provisions of the Code of Civil
Procedure pertaining to counter claims argue against judgment notes, especially as
the Code provides that in case the defendant or his assignee omits to set up a
counterclaim, he cannot afterwards maintain an action against the plaintiff
therefor. (Secs. 95, 96, 97.) At least one provision of the substantive law,
namely, that the validity and fulfillment of contracts cannot be left to the will
of one of the contracting parties (Civil Code, art. 1356), constitutes another
indication of fundamental legal purposes.
The attorney for the appellee contends that the Negotiable Instruments Law (Act No.
2031) expressly recognizes judgment notes, and that they are enforcible under the
regular procedure. The Negotiable Instruments Law, in section 5, provides that "The
negotiable character of an instrument otherwise negotiable is not affected by a
provision which ". . . (b) Authorizes a confession of judgment if the instrument be
not paid at maturity." We do not believe, however, that this provision of law can
be taken to sanction judgments by confession, because it is a portion of a uniform
law which merely provides that, in jurisdiction where judgment notes are
recognized, such clauses shall not affect the negotiable character of the
instrument. Moreover, the same section of the Negotiable Instruments. Law concludes
with these words: "But nothing in this section shall validate any provision or
stipulation otherwise illegal."

The court is thus put in the position of having to determine the validity in the
absence of statute of a provision in a note authorizing an attorney to appear and
confess judgment against the maker. This situation, in reality, has its advantages
for it permits us to reach that solution which is best grounded in the solid
principles of the law, and which will best advance the public interest.

The practice of entering judgments in debt on warrants of attorney is of ancient


origin. In the course of time a warrant of attorney to confess judgement became a
familiar common law security. At common law, there were two kinds of judgments by
confession; the one a judgment by cognovit actionem, and the other by confession
relicta verificatione. A number of jurisdictions in the United States have accepted
the common law view of judgments by confession, while still other jurisdictions
have refused to sanction them. In some States, statutes have been passed which have
either expressly authorized confession of judgment on warrant of attorney, without
antecedent process, or have forbidden judgments of this character. In the absence
of statute, there is a conflict of authority as to the validity of a warrant of
attorney for the confession of judgement. The weight of opinion is that, unless
authorized by statute, warrants of attorney to confess judgment are void, as
against public policy.

Possibly the leading case on the subject is First National Bank of Kansas City vs.
White ([1909], 220 Mo., 717; 16 Ann. Cas., 889; 120 S. W., 36; 132 Am. St. Rep.,
612). The record in this case discloses that on October 4, 1990, the defendant
executed and delivered to the plaintiff an obligation in which the defendant
authorized any attorney-at-law to appear for him in an action on the note at any
time after the note became due in any court of record in the State of Missouri, or
elsewhere, to waive the issuing and service of process, and to confess judgement in
favor of the First National Bank of Kansas City for the amount that might then be
due thereon, with interest at the rate therein mentioned and the costs of suit,
together with an attorney's fee of 10 per cent and also to waive and release all
errors in said proceedings and judgment, and all proceedings, appeals, or writs of
error thereon. Plaintiff filed a petition in the Circuit Court to which was
attached the above-mentioned instrument. An attorney named Denham appeared pursuant
to the authority given by the note sued on, entered the appearance of the
defendant, and consented that judgement be rendered in favor of the plaintiff as
prayed in the petition. After the Circuit Court had entered a judgement, the
defendants, through counsel, appeared specially and filed a motion to set it aside.
The Supreme Court of Missouri, speaking through Mr. Justice Graves, in part said:

But going beyond the mere technical question in our preceding paragraph discussed,
we come to a question urged which goes to the very root of this case, and whilst
new and novel in this state, we do not feel that the case should be disposed of
without discussing and passing upon that question.

x x x x x x x x x
And if this instrument be considered as security for a debt, as it was by the
common law, it has never so found recognition in this state. The policy of our law
has been against such hidden securities for debt. Our Recorder's Act is such that
instruments intended as security for debt should find a place in the public
records, and if not, they have often been viewed with suspicion, and their bona
fides often questioned.

Nor do we thing that the policy of our law is such as to thus place a debtor in the
absolute power of his creditor. The field for fraud is too far enlarged by such an
instrument. Oppression and tyranny would follow the footsteps of such a diversion
in the way of security for debt. Such instruments procured by duress could shortly
be placed in judgment in a foreign court and much distress result therefrom.

Again, under the law the right to appeal to this court or some other appellate
court is granted to all persons against whom an adverse judgment is rendered, and
this statutory right is by the instrument stricken down. True it is that such right
is not claimed in this case, but it is a part of the bond and we hardly know why
this pound of flesh has not been demanded. Courts guard with jealous eye any
contract innovations upon their jurisdiction. The instrument before us, considered
in the light of a contract, actually reduces the courts to mere clerks to enter and
record the judgment called for therein. By our statute (Rev. St. 1899, sec. 645) a
party to a written instrument of this character has the right to show a failure of
consideration, but this right is brushed to the wind by this instrument and the
jurisdiction of the court to hear that controversy is by the whose object is to
oust the jurisdiction of the courts are contrary to public policy and will not be
enforced. Thus it is held that any stipulation between parties to a contract
distinguishing between the different courts of the country is contrary to public
policy. The principle has also been applied to a stipulation in a contract that a
party who breaks it may not be sued, to an agreement designating a person to be
sued for its breach who is nowise liable and prohibiting action against any but
him, to a provision in a lease that the landlord shall have the right to take
immediate judgment against the tenant in case of a default on his part, without
giving the notice and demand for possession and filing the complaint required by
statute, to a by-law of a benefit association that the decisions of its officers on
claim shall be final and conclusive, and to many other agreements of a similar
tendency. In some courts, any agreement as to the time for suing different from
time allowed by the statute of limitations within which suit shall be brought or
the right to sue be barred is held void.

x x x x x x x x x

We shall not pursue this question further. This contract, in so far as it goes
beyond the usual provisions of a note, is void as against the public policy of the
state, as such public policy is found expressed in our laws and decisions. Such
agreements are iniquitous to the uttermost and should be promptly condemned by the
courts, until such time as they may receive express statutory recognition, as they
have in some states.

x x x x x x x x x

From what has been said, it follows that the Circuit Court never had jurisdiction
of the defendant, and the judgement is reversed.

The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L.R.A. [N.
S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another well-considered
authority. The notes referred to in the record contained waiver of presentment and
protest, homestead and exemption rights real and personal, and other rights, and
also the following material provision: "And we do hereby empower and authorize the
said A. B. Farquhar Co. Limited, or agent, or any prothonotary or attorney of any
Court of Record to appear for us and in our name to confess judgement against us
and in favor of said A. B. Farquhar Co., Limited, for the above named sum with
costs of suit and release of all errors and without stay of execution after the
maturity of this note." The Supreme Court of West Virginia, on consideration of the
validity of the judgment note above described, speaking through Mr. Justice Miller,
in part said:

As both sides agree the question presented is one of first impression in this
State. We have no statutes, as has Pennsylvania and many other states, regulating
the subject. In the decision we are called upon to render, we must have recourse to
the rules and principles of the common law, in force here, and to our statute law,
applicable, and to such judicial decisions and practices in Virginia, in force at
the time of the separation, as are properly binding on us. It is pertinent to
remark in this connection, that after nearly fifty years of judicial history this
question, strong evidence, we think, that such notes, if at all, have never been in
very general use in this commonwealth. And in most states where they are current
the use of them has grown up under statutes authorizing them, and regulating the
practice of employing them in commercial transactions.

x x x x x x x x x

It is contended, however, that the old legal maxim, qui facit per alium, facit per
se, is as applicable here as in other cases. We do not think so. Strong reasons
exist, as we have shown, for denying its application, when holders of contracts of
this character seek the aid of the courts and of their execution process to enforce
them, defendant having had no day in court or opportunity to be heard. We need not
say in this case that a debtor may not, by proper power of attorney duly executed,
authorize another to appear in court, and by proper endorsement upon the writ waive
service of process, and confess judgement. But we do not wish to be understood as
approving or intending to countenance the practice employing in this state
commercial paper of the character here involved. Such paper has heretofore had
little if any currency here. If the practice is adopted into this state it ought to
be, we think, by act of the Legislature, with all proper safeguards thrown around
it, to prevent fraud and imposition. The policy of our law is, that no man shall
suffer judgment at the hands of our courts without proper process and a day to be
heard. To give currency to such paper by judicial pronouncement would be to open
the door to fraud and imposition, and to subject the people to wrongs and injuries
not heretofore contemplated. This we are unwilling to do.

A case typical of those authorities which lend support to judgment notes is First
National Bank of Las Cruces vs. Baker ([1919], 180 Pac., 291). The Supreme Court of
New Mexico, in a per curiam decision, in part, said:

In some of the states the judgments upon warrants of attorney are condemned as
being against public policy. (Farquhar and Co. vs. Dahaven, 70 W. Va., 738; 75
S.E., 65; 40 L.R.A. [N. S.], 956; Ann. Cas. [1914 A]. 640, and First National Bank
of Kansas City vs. White, 220 Mo., 717; 120 S. W., 36; 132 Am. St. Rep., 612; 16
Ann. Cas., 889, are examples of such holding.) By just what course of reasoning it
can be said by the courts that such judgments are against public policy we are
unable to understand. It was a practice from time immemorial at common law, and the
common law comes down to us sanctioned as justified by the reason and experience of
English-speaking peoples. If conditions have arisen in this country which make the
application of the common law undesirable, it is for the Legislature to so
announce, and to prohibit the taking of judgments can be declared as against the
public policy of the state. We are aware that the argument against them is that
they enable the unconscionable creditor to take advantage of the necessities of the
poor debtor and cut him off from his ordinary day in court. On the other hand, it
may be said in their favor that it frequently enables a debtor to obtain money
which he could by no possibility otherwise obtain. It strengthens his credit, and
may be most highly beneficial to him at times. In some of the states there
judgments have been condemned by statute and of course in that case are not
allowed.

Our conclusion in this case is that a warrant of attorney given as security to a


creditor accompanying a promissory note confers a valid power, and authorizes a
confession of judgment in any court of competent jurisdiction in an action to be
brought upon said note; that our cognovit statute does not cover the same field as
that occupied by the common-law practice of taking judgments upon warrant of
attorney, and does not impliedly or otherwise abrogate such practice; and that the
practice of taking judgments upon warrants of attorney as it was pursued in this
case is not against any public policy of the state, as declared by its laws.

With reference to the conclusiveness of the decisions here mentioned, it may be


said that they are based on the practice of the English-American common law, and
that the doctrines of the common law are binding upon Philippine courts only in so
far as they are founded on sound principles applicable to local conditions.

Judgments by confession as appeared at common law were considered an amicable,


easy, and cheap way to settle and secure debts. They are a quick remedy and serve
to save the court's time. They also save the time and money of the litigants and
the government the expenses that a long litigation entails. In one sense,
instruments of this character may be considered as special agreements, with power
to enter up judgments on them, binding the parties to the result as they themselves
viewed it.

On the other hand, are disadvantages to the commercial world which outweigh the
considerations just mentioned. Such warrants of attorney are void as against public
policy, because they enlarge the field for fraud, because under these instruments
the promissor bargains away his right to a day in court, and because the effect of
the instrument is to strike down the right of appeal accorded by statute. The
recognition of such a form of obligation would bring about a complete
reorganization of commercial customs and practices, with reference to short-term
obligations. It can readily be seen that judgement notes, instead of resulting to
the advantage of commercial life in the Philippines might be the source of abuse
and oppression, and make the courts involuntary parties thereto. If the bank has a
meritorious case, the judgement is ultimately certain in the courts.

We are of the opinion that warrants of attorney to confess judgment are not
authorized nor contemplated by our law. We are further of the opinion that
provisions in notes authorizing attorneys to appear and confess judgments against
makers should not be recognized in this jurisdiction by implication and should only
be considered as valid when given express legislative sanction.

The judgment appealed from is set aside, and the case is remanded to the lower
court for further proceedings in accordance with this decision. Without special
finding as to costs in this instance, it is so ordered.

Araullo, C.J., Avanceña, Villamor, Ostrand, Johns and Romualdez, JJ., concur.

Footnotes

1MEMORANDA OF "AMICI CURIAE"

Attorney Thos. L. Hartigan, of Hartigan and Welch, states:

"Though we are attorneys for two of the large banks here and keenly interested in
the introduction of any improvements that would make for simplication of procedure
and rapidity of practice, we cannot favor the introduction of confessions of
judgment in the Philippine islands. In our opinion, it would open the doors to
fraud to an extent that would more than counterbalance any advantages of its use.

"With our lack of system in recording judgments and with the practice of keeping
merchants' books in various foreign languages, there would be ample opportunity for
a debtor to make preferences by confessions of judgment which could not be
discovered by the creditors until too late and which would be nearly impossible to
set aside even when discovered in time.

"Although, as representatives of the banks, we are representing the creditor class,


we believe the introduction of confessions of judgment would ultimately cause much
more loss than benefit to that class."

Attorney Clyde A. DeWitt, of Fisher and DeWitt, states:

"There is no statutory sanction in this jurisdiction for such provisions in


negotiable instruments. Section 5 (b) of the Negotiable Instruments Law does not
constitute such sanction because (1) it merely provides that such clauses will not
affect the negotiable character of the instrument, and (2) it concludes with
language showing that the Legislature did not intend thereby to validate any
provision otherwise unlawful. The language is: 'But nothing in this section shall
validate any provision or stipulation otherwise illegal.'

"The question then is whether or not, in the absence of express legislative


sanction, such warrants of attorney are valid. There are not many American cases in
which this precise question has been considered, and in those cases in which the
question has been raised, the reasoning of the courts has been colored by the fact
that the commercial use of these warrants of attorney as security for debt was
sanctioned at common law, and the procedural statutes are held to be merely
cumulative and not in derogation of the common law remedies. We, of course, have no
such situation here.

"The cases are collected in a note to First National Bank vs. White (220 Mo., 717),
found in 16 Ann. Cas., 893, and it is there shown that in Missouri and Kansas such
provisions are held to be void as against the public policy of the State as
expressed in its laws and the decisions of its courts, while in Colorado and
Illinois their validity was upheld as a familiar common-law security not affected
by the procedural statutes. Yet it is there pointed out that in Kahn vs. Lesser (97
Wis., 217, 72 N.W., 739), the court, in referring to a judgment by confession under
warrant of attorney in a promissory note, said:

"'The judgment in this case must stand, if at all, by the authority of the statute.
The proceeding by which it was entered was outside and in derogation of the common-
law practice of courts; and the statute, as well as the proceedings under it, must
be strictly construed.'"

"In Iowa, in an early case, McClish vs. Manning (3 Green, 233), the validity of
these warrants of attorney was upheld, referring to a statute authorizing any
person to confess a judgment, by himself or his attorney. In a later decision,
Hamilton vs. Schoenberger (47 Ilowa, 385), it was expressly held that such a
provision, in a note could not be enforced in the courts of that State, and was not
authorized or contemplated by its laws. And in Tolman vs. Jansen (106 Iowa, 455),
it was held that such a provision, being void, would not affect the negotiability
of a note, even though its effect would be to make uncertain the time of payment.

"The reasoning in First National Bank vs. White, supra, is persuasive. The court
there held that these warrants of attorney are void as against the public policy of
the state on the ground, first, that their effect is to enlarge the field for
fraud; second, that under such an instrument the promissor bargains away his right
to his day in court; third, that the effect of the instrument is to strike down the
right to appeal accorded by statute, and, fourth, that there was no provision for
the public recording of such an instrument if regarded as a security for a debt.

"It seems to me that on the precise grounds stated in the White case, these
warrants of attorney should be held void as against public policy in this
jurisdiction. If given effect, they bargain away the jurisdiction of the courts to
try and determine the liability of the maker of the note on its merits. To uphold
them would be to facilitate the operations of usurers, the collection of gambling
debts, and would make difficult, if not impossible under our procedure, the setting
aside of judgments entered in virtue thereof where the execution of the instrument
was obtained by fraud, duress, or where there had been an entire failure of
consideration. I can think of no advantage which would result to the commercial
world from upholding these warrants of attorney which would outweigh the foregoing
considerations."

Attorney e. Arthur Perkins, of Perkins and Kincaid, states:

"Leaving aside entirely the legal considerations involved, I feel that there is
only one answer to your inquiry, and that is, that the best interests of the
commercial life of the Philippines require the non-recognition of such a form of
judgment note. Feeling that you would want to know the reasons which impell me to
adopt such a conclusion, I will say briefly that if the Supreme Court should, by a
decision, recognize such a judgment note and thereby place the stamp of approval
upon transactions of such a nature, the entire business population of the
Philippine Islands would be justified in their future transactions with debtors in
requiring, in all instances, the execution of notes of a similar tenor, with the
consequence that the debtor would thereby be deprived, to all intents and purposes,
upon ignorant debtors. It will prove a serious drawback to the campaign being now
waged against usury.

"There is the further fear that the banks and money lenders having accounts now
outstanding will immediately require every debtor to execute that form of note and
to refuse further extensions of credit unless sit is done, which the debtor under
the stress of circumstances will be compelled to accept, amounting in effect to
duress.

"The recognition of such a form of obligation would be so revolutionary in


character as to bring about a complete reorganization of commercial customs and
practices with reference to short-term obligations.

"Having in mind that the Philippine National Bank is practically the only
institution which can assist the farmers and agriculturists, the practice of
requiring a judgment note would place the latter wholly at the mercy of the bank,
and this is stated without any reflection on the bank, but merely to point out one
of the consequent evils which will necessarily follow if the practice should
receive the high judicial sanction which a judgment of the Supreme Court would
necessarily give to it.

"Another feature which occurs to me is that where any new enterprise is being
launched, it is universally the custom for such company to arrange with some
banking institution for credit facilities, over and above the capital with which it
brings business. Should it become the custom here to require the execution of so-
called judgment notes, organizers of corporations, partnerships and the like, who
have in mind to secure additional working capital or credit facilities from banks,
will be very reluctant to put their funds into any enterprises which could be
destroyed without warning by the creditor exercising the rights which that form of
transaction would give him. This is would act therefore as a deterrent to new
enterprises and the development of industry through individual initiative and with
private funds.

"Let us take a very simple illustration of his. Suppose that you and I should form
a partnership, with a capital of P50,000 to buy hemp and , in connection with our
business, we went to some banking institution for the purpose of securing credit
facilities, as is customary, in the conduct of our business. Let us then suppose
that the bank, taking into consideration the capital which we ourselves had
furnished and our standing in the community, was willing to allow us a credit in
the further sum of P50,000 upon our signing a so-called judgment note. Would not
you and I consider a long time before we would so far obligate ourselves as to
place it in the power of the bank to send their attorney over to court, upon the
least provocation or at the first unfavorable rumor, and to confess judgment in our
names, which would permit the sheriff to close us out without even an opportunity
to be heard?

"The sum and substance of the whole proposition is that such a practice is contrary
to good morals."

Attorney David C. Johnson, of Gibbs, McDonough and Johnson, states:

"It seems that under the common law a confession of judgment was only allowable by
the defendant himself, either before or after appearance and answer. The confession
of judgment by warrant of attorney is a statutory development (15 R.C.L., 656, 657;
17 Am. and Eng. Encyc. of Law [2d ed.], 765; Pl. and Pr., 973-975; Masson vs. Ward,
80 Vt., 290; 130 A. S. R., 987,988).

"The procedure contemplated in the note quoted in your letter is contrary to that
contemplated in our code of procedure, which gives to all defendants an opportunity
at least to be heard. An action on the note in question could be so presented that
the defendant would never be summoned or notified, since an appearance and
confession of judgment might be filed simultaneously. We believe that this
procedure should not be recognized in this jurisdiction by implication, but should
have legislative sanction with the rights of the defendant amply safeguarded. We
believe that section 5 of Act No. 2031 does not of itself sanction any of the acts
mentioned in that section, but is only a statement regarding the negotiable
character of the instrument. Subsection A of section 5 states that the authority to
sell collateral security does not affect negotiability. As we understand the
decision of the Supreme Court in the case of Mahoney vs. Tuason(39 Phil., 952), the
creditor in this jurisdiction is not authorized by law to sell collateral security
except in the manner provided in section 14 of Act No. 1508. This would seem to
reinforce our opinion.

"There are some favorable features of a judgment note or warrant for confession of
judgment, but we believe that there are many objections which outweigh any of the
advantages. Forgery and usury are more prevalent in these Islands than in the
United States. The sanctioning of this procedure would add an additional weapon to
the money lender who desires to overreach his debtor.

"We have delayed answering your letter in order that we might consult our Mr.
Gibbs, who returned from Baguio yesterday.

"The foregoing is the consensus of opinion of the member of this firm."

Attorney Julian Wolfson states:

"It is assumed that the only question propounded is :


"'Admitting that there may be some doubt, as to a correct solution, which solution,
the recognition of a confession of judgment, or a non-recognition of a confession
of judgment, would be for the best interest of the commercial life of the
Philippines? and that no opinion is required upon the incidental questions
previously asked, as same have already been determined by an examination of such
authorities as: 23 Cyc., pp. 699, 701-2-3-5-6-7, 723-5; 6 C. J., pp. 645-6 (Notes
35 & 42); 8 C. J., p. 128 (Notes 43-47); 12 C. J., p. 418 (Note 37); and such
leading textbooks as 'Brannan's Negotiable Instruments Law' and 'Selover on
Negotiable Instruments.' "Everyone is entitled to 'his day in court.' This
right may be waved after an opportunity has been given to exercise the right, but
must not and cannot be taken away before an opportunity has been given to exercise
the right.

"The ordinary ship's bill of lading and the ordinary fire and marine insurance
policy are generally printed on forms prepared by the carrier and the insurer
respectively, and generally contain a clause making it a condition precedent to the
institution of an action to first submit the matter to a board of arbitration. The
Supreme Court has never recognized this clause. The reasons are stated in the
opinions. Once submitted to arbitration, then another question is raised.

"Special defenses to written instruments are common. Need we do more than cite the
following cases: Maulini vs. Serrano (28 Phil., 640); Henry W. Peabody and Co. vs.
Bromfield and Ross (38 Phil., 841); Cuyugan vs. Santos (34 Phil., 100; 39 Phil.,
970).

"If the judgment note (this term is used throughout for brevity and as it is the
recognized term) is to be recognized, what chance has defendant of defending as did
the defendants in the above cited cases? Non!

"Often a promissory note is a mere formality taken by a bank as evidence of


indebtedness, while the real indebtedness may be for a superior or inferior amount
incurred by way of overdraft, letters of credit outstanding, acceptances to mature,
or a thousand other forms of banking credit. Such "judgment notes" are generally
made payable on demand. In the case at bar, the note is made payable on demand. The
real indebtedness may be partially paid, or the liquidation may be going along too
slow to suit the bank and then use is made of the judgment note. The defendant
might have perfect defense except for the judgment note. Would not article 1269 of
the Civil Code here apply?

"The 'judgment notes,' is not once in a thousand times signed at the time of
receiving money from the bank. The indebtedness represented thereby is incurred in
prior transactions, the obligation became past due and the bank, as a forcible
measure, produces one of these 'judgment notes,' when the debtor is absolutely
helpless, and says 'Sign on the dotted line' and the debtor has no option, he
signs. The minds of the parties never met. The debtor owes the money, knows that
the bank must have evidence of the indebtedness to pass the auditors and the debtor
further realizes he must accept that bank's dictation, because if he declines, he
is liable to immediate ruin, or if not that, he will never get further
accommodation from the bank. He does not realize, even if he knows, what is meant
by a 'judgment note.' Again, would not article 1269 of the Civil Code here apply?

"Just a few months ago there was a suit instituted by a local bank for a large sum
of money, based on a written instrument which, on its face, seemed absolute.
Special defenses were pleaded, setting up that the instrument did not express the
real understanding of the parties and the real understanding was set up. The
special defenses were fully proved and the lower court dismissed the bank's suit.
The bank did not even attempt to appeal to the Supreme Court (See Cause No. 18239
of the Docket of the Court of First Instance of Manila). Suppose the instrument
sued on had contained a clause of confession of judgment, what chance would
defendant have had to prove his defense? None!

"Let us go a step further and see where this leads us. A is a dealer in hardware
and sells B a bill of goods. A prints a form, which he has B to sign, in which B
acknowledges receipt of the goods and in consideration thereof premises to pay A
and "a confession of judgment" clause is inserted. The goods turn out entirely
different from those ordered and invoiced. B refuses to pay. A sues on his
"judgment note." What change has B? None!

"Very often a promissory note is only one of a series of documents given as


security for the debt. What about considering the other documents which bear on the
transaction?

"A bank may have made certain advances and may have undertaken to make more, but
fails to do so, to the damage and prejudice of debtor. Let us assume that the bank
agreed to advance several hundred thousand pesos in installments of P60,000 each,
and had advanced only the first installments, taking a "judgment note" for said
first installment, and had failed to advance further, to the damage of the debtor.
What would become of section 97 of the Code of Civil Procedure? How would debtor be
able to exercise his right of counterclaim? Was it ever contemplated at the time of
signing the judgment note that the debtor would not only waive defense, but
absolutely shut himself out of court, as he would, according to section 97 above
cited, on his counterclaim? Yet again, would not article 1269 of the Civil Code
here apply?

"We dare not attempt to elaborate on what would happen in the provinces of the
Philippines should a "judgment note" be held valid.

"What about the Usury Law? How could a defense be offered there? The usurious rate
might not appear on the face of the "judgment note," but it may be there all the
same.

"Examples could be multiplied until the very absurdity of the proposition would be
clearly seen, even by a blind man.

"Of what possible benefit would the recognition of a "judgment note" serve "the
best interest of the commercial life of the Philippines? None! An honest creditor
is willing to let his debtor have his day in court and is willing to prove to the
court his case. It might take slightly longer to go through with a trial, but that
cannot be considered a set-back. But, on the other hand, a dishonest creditor would
take unfair advantage of a "judgment note" and would use it to the utmost to harass
and take advantage of the poor and helpless debtor. The real consequences likely,
in fact sure, to arise from such recognition are horrible beyond words to
contemplate.

"There can be but one answer to the proposition and that is: The non-recognition of
a confession of judgment would be for the best interests of the commercial life of
the Philippines."

Attorney J. G. Lawrence, of Ross and Lawrence, states:

"We are aware of no expression of our Legislature or courts which would indicate
that confessions of judgment under powers given in a promissory note are contrary
to public policy. This action was regularly brought in accordance with the
provisions of the Code of Civil Procedure and the defendant served with process.
The answer, confessing judgment, was filed in strict accordance with the powers
contained in the note — a power coupled with an interest which defendant would be
estopped of denying. We think that no express legal sanction is necessary to
legalize such a proceeding.
"On the question of what ought to be the public policy of the Philippines, we hold
quite a different opinion. While the use of judgment notes might in some cases
expedite the collection of just debts, we believe that under conditions as exist
here, their use should be discouraged. The lend themselves easily to fraud in the
hands of friends of a dishonest debtor, and to extortion in the hands of usurers
who are already too well equipped with the pacto de retro.

"While we believe that the position of the bank is sound legally, we should be very
glad to be proven mistaken."

Attorney Francis B. Mahoney, of the Philippine Trust Company, states:

"I have not gone into the law and cases, except to take a glance at the subject of
judgments in Volume 15 of Ruling Case Law. However, the reasons indicated on page
651 thereof are significant.

"Unquestionably, if our Legislature provided in unmistakable terms for confession


of judgment as herein indicated, the validity and constitutionality of the
enactment might be questioned as failing to provide those constitutional safeguards
of taking a man's property only after a day in court and after the due process of
law.

"This conclusion is stronger — a fortiori — where the enacting provision — if such


section 5 of Act. No. 2031 may be called — is of a lefthanded nature, apparently
relating only to negotiability — incidentally thus answering here your first
inquiry. Whatever legal principles there might be in favor of recognizing a
confession of judgment — for example, the matter of expediency — stronger and more
vital principles oppose such recognition.

"By refusing to recognize confession of judgment under existing statutes or under


general legal principles, at the worst phase from the point of view of the
plaintiff bank, there would result only possible delay, costs and attorney's fees,
which, after all, are only passed on to the clients of the bank in the shape of
interests, charges. etc. If the bank has a meritorious case, the judgment is
ultimately certain as courts.

"If the defendant debtor has any defense of merit, he is given an opportunity to
present it, as, for example, in the matter of usury so common, so difficult to
uncover an such an unscrupulous rival of legitimate banking, the courts may keep
their doors open to the equities of each individual case. Whereas, if defendant,
who theoretically may allege fraud an who practically has great difficulty in
proving it, must rely upon a defense of fraud, he has little chance and the doors
of the court are closed to any other defense.

"In the final analysis, the matter simmers down to: 1. Possible delay in judgment
with costs, etc. 2. Certain justice in the end. 3. The eyes and doors of courts
open to the equities of each individual case. 4. Equality before the law,

or

(a) Expediting judgment. (b) Defendant debtor practically kept out of court by
additional expense and difficulty in securing a hearing. (c) Putting a strong
weapon in the hands of unscrupulous persons and taking the strength necessary to
wield this weapon from the courts.

"At first glance, if a debtor signs a document throwing away his right to be heard,
the average man has a feeling such debtor deserves to suffer the consequences. If
that were the entire story, probably he should. But what man, needing money badly
enough — facing strenuous necessity — will not in the circumstances be inclined to
look on the cheerful side-to sign and get the money, letting the future take care
of itself? Such is the frailty of human nature. Then, as the usual thing, the rich
and powerful can take care of themselves, and it is usually others who have need of
courts, just laws and liberal interpretation of them.

"No doubt, banks would favor expediting judgments against their debtors, other
things being equal. And no doubt, additional delay in courts and the incidental
costs thereof will be borne by the clients of the bank. But sound banking is not
established and enhanced by harsh law which put strong weapons in powerful hands.
Contented peoples, safe laws and sound banking usually go hand in hand."

Professor Jose A. Espiritu, of the University of the Philippines, states:

"Permit me to cite first of all the authorities that I have gathered concerning the
principal question at issue in the case mentioned in your letter, namely, 'The
Effect and Validity of Confession of Judgement in the Philippines.'

"1. Confession of judgment has been defined as "a voluntary submission to the
jurisdiction of the court, giving by consent and without the service of process,
what could otherwise be obtained by summons and complaint, and other formal
proceedings, an acknowledgment of indebtedness, upon which it is contemplated that
a judgment may and will be rendered." (8 Cyc., pp. 563, 564.)

"2. As to the general effects of confession of judgment, the following statements


may be mentioned: 'A warrant to confess judgment does not destroy the negotiability
of the note. Such a note is commonly called a "judgement note." Decisions to the
contrary in the States where the Negotiable Instruments Law is now in force are
abrogated thereby, since it expressly provides that the negotiable character of an
instrument otherwise negotiable is not affected by a provision which authorizes a
confession of judgment, if the instrument is not paid at maturity. However, this
statutory provision does not apply to stipulations for the confession of judgment
"prior" to maturity.' (8 C.J., p. 128, sec. 222.)

"3. Nature of Requisites. "A judgment may be rendered upon the confession of
defendant, either in an action regularly commenced against him by the issuance and
service of process, in which case the confession may be made by his attorney of
record, or, without the institution of a suit, upon a confession by defendant in
person or by his attorney in fact. It implies something more than a mere admission
of a debt to plaintiff; in addition, it is defendant's consent that a judgment
shall be entered against him. . . . ." (23 cyc., 699.)

"4. Statutory Provisions, "Statutes regulating the confession of judgments without


action, or otherwise than according to the course of the common law, are strictly
construed, and a strict compliance with their provisions must be shown in order to
sustain the validity of the judgment." (Chapin vs. Tompson, 20 Cla., 681.) "And
this applies also to statutory restriction upon the right to confess judgment, as
that authority to confess judgment shall not be given in the same instrument which
contains the promise or obligation to pay the debt, or that such confession shall
not be authorized by any instrument executed prior to suit brought." (23 Cyc., 699,
700.)

"5. Warrant or Power of Attorney — Validity and Necessity. 'A judgment by


confession may be entered upon a written authority, called a warrant or letter of
attorney, by which the debtor empowers an attorney to enter an appearance for him,
waive process, and confess judgment against him for a designated sum, except where
this method of proceeding is prohibited by statute. The warrant as the basis of
judgment is generally required to be placed on file in the clerk's office, and no
judgment can be so entered until it is so filed.' (23 Cyc., 703.)
"6. Requisites and Sufficiency. 'A warrant or power of attorney to confess
judgement should be in writing and should conform to the requirements of the
statute in force at the time of its execution, although in the absence of specific
statutory directions it is sufficient, without much regard to its form, if it
contains the essential of a good power and clearly states its purpose. It must be
signed by the person against whom the judgment is to be entered . . . .' (23 Cyc.,
704.)

"The above quoted authorities are among the various authorities I found bearing on
the question at issue. As it can be readily seen none of them decides squarely and
definitely the questions propounded in your letter. One thing, however, seems to be
clear, from the very provision of section 5 (b) of the Negotiable Instruments Law
and from the quotation No. 2 of this letter, that a provision in a note or bill of
exchange authorizing a confession of judgment in default of payment at its maturity
has particular reference, in so far as Act No. 2031 is concerned, only to the
negotiable character of an instrument. I do not believe that the Legislature had
the intention in passing the said Act No. 2031 to introduce in the Philippines a
new practice in our Remedial Law, namely, that of confession of judgment, which is
purely procedural in nature.

"Now as to the second question, to wit: 'Does the silence of the Code of Civil
Procedure on the subject mean that a confession of judgement cannot be recognized
in this jurisdiction, or can a judgment by confession be imported into the
Philippines under general legal principles?' Before answering this question
attention is respectfully called to the quotation No. 4 of this letter, which
expressly provides that statutes regulating confession of judgments must be
strictly construed and their provisions strictly complied with to sustain the
validity of judgments rendered under such statutes. Now it being admitted that
there is no express provision in our Code of Civil Procedure authorizing or
sanctioning this mode of practice in this jurisdiction, and consequently there are
no regulations provided to be followed in this particular remedy, I am therefore of
the opinion that confession of judgment should not be deemed as imported in the
Philippines under the general legal principles. The remedy itself is a most summary
one, and when the defendant-debtor, instead of admitting or allowing a judgment be
taken against him, presents his appearance and answers the complaint filed against
him, it seems that the trial court should not render a judgement without first
hearing the evidence that the parties may wish to submit before him, for it may
happen that the defendant-debtor may have some valid or good defenses against the
plaintiff-creditor. This is especially true in the case of a counterclaim that the
defendant may have against the plaintiff as provided in sections 95 and 96 of the
Code of Civil Procedure. The same Code provides that in case of an omission to set
up his counterclaim, the defendant or his assignee loses all his right to bring
further suit on such claim. (Sec. 97, Act No. 190.)

"In answer to the last question, namely: "Admitting that there may be some doubt,
as to the correct solution, which solution, the recognition of a confession of
judgement, or the non-recognition of a confession of judgment, would be for the
best interests of the commercial life of the Philippines?" I wish first of all to
state that a confession of judgment is a quick remedy. It saves time and money as
far as the parties to the suit are concerned if the same is properly and legally
brought. It saves the court's time and the government the expense that a long
litigation entails. As to its disadvantages we may say among other things the
following: 1. It may be abused in the same way as the usurious rates of interest on
loans are now in the Philippines, because a borrower who is in great need of money
might be induced, if not actually compelled, to sign such a burdensome obligation;
2. It deprives the defendant of his day in court, and as a consequence it will
prevent him to set up and prove before the court his just claims and other lawful
defenses against the plaintiff; 3. It will create multiplicity of actions in this
jurisdiction, for if the confession of judgment has been wrongfully or unjustly
entered, the judgment debtor may start another litigation on the same subject-
matter that might have been brought before the court in case a proper trial was
formally held before the rendition of such a judgment; and 4. It does not really
hold the plaintiff who has a good cause of action against the defendant as his
proofs will surely establish his claims and consequently a judgment must
necessarily be rendered in his favor.

"From the above statements, I am of the opinion that unless proper regulations are
first duly introduced and incorporated in our remedial law, confession of
judgments, instead of resulting advantageous to our commercial life in the
Philippines, might be the sources of abuse and oppression. The very fact that
confession of judgement is almost summary and in fact a violent remedy, it should
first of all be properly regulated by statute, and those regulations must be
strictly complied with, before the court should concede to such a remedy."

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-10221 February 28, 1958

Intestate of Luther Young and Pacita Young, spouses. PACIFICA JIMENEZ, petitioner-
appellee,
vs.
DR. JOSE BUCOY, administrator-appellant.

Frank W. Brady and Pablo C. de Guia, Jr. for appellee.


E. A. Beltran for appellant.

BENGZON, J.:

In this intestate of Luther Young and Pacita Young who died in 1954 and 1952
respectively, Pacifica Jimenez presented for payment four promissory notes signed
by Pacita for different amounts totalling twenty-one thousand pesos (P21,000).

Acknowledging receipt by Pacita during the Japanese occupation, in the currency


then prevailing, the administrator manifested willingness to pay provided
adjustment of the sums be made in line with the Ballantyne schedule.

The claimant objected to the adjustment insisting on full payment in accordance


with the notes.

Applying doctrines of this Court on the matter, the Hon. Primitive L. Gonzales,
Judge, held that the notes should be paid in the currency prevailing after the war,
and that consequently plaintiff was entitled to recover P21,000 plus attorneys fees
for the sum of P2,000.

Hence this appeal.


Executed in the month of August 1944, the first promissory note read as follows:

Received from Miss Pacifica Jimenez the total amount of P10,000) ten thousand pesos
payable six months after the war, without interest.

The other three notes were couched in the same terms, except as to amounts and
dates.

There can be no serious question that the notes were promises to pay "six months
after the war," the amounts mentioned.

But the important question, which obviously compelled the administrator to appeal,
is whether the amounts should be paid, peso for peso, or whether a reduction should
be made in accordance with the well-known Ballantyne schedule.

This matter of payment of loans contracted during the Japanese occupation has
received our attention in many litigations after the liberation. The gist of our
adjudications, in so far as material here, is that if the loan should be paid
during the Japanese occupation, the Ballantyne schedule should apply with
corresponding reduction of the amount.1 However, if the loan was expressly agreed
to be payable only after the war or after liberation, or became payable after those
dates, no reduction could be effected, and peso-for-peso payment shall be ordered
in Philippine currency.2

The Ballantyne Conversion Table does not apply where the monetary obligation, under
the contract, was not payable during the Japanese occupation but until after one
year counted for the date of ratification of the Treaty of Peace concluding the
Greater East Asia War. (Arellano vs. De Domingo, 101 Phil., 902.)

When a monetary obligation is contracted during the Japanese occupation, to be


discharged after the war, the payment should be made in Philippine Currency. (Kare
et al. vs. Imperial et al., 102 Phil., 173.)

Now then, as in the case before us, the debtor undertook to pay "six months after
the war," peso for peso payment is indicated.

The Ang Lam3 case cited by appellant is not controlling, because the loan therein
given could have been repaid during the Japanese occupation. Dated December 26,
1944, it was payable within one year. Payment could therefore have been made during
January 1945. The notes here in question were payable only after the war.

The appellant administrator calls attention to the fact that the notes contained no
express promise to pay a specified amount. We declare the point to be without
merit. In accordance with doctrines on the matter, the note herein-above quoted
amounted in effect to "a promise to pay ten thousand pesos six months after the
war, without interest." And so of the other notes.

"An acknowledgment may become a promise by the addition of words by which a promise
of payment is naturally implied, such as, "payable," "payable" on a given day,
"payable on demand," "paid . . . when called for," . . . (10 Corpus Juris Secundum
p. 523.)

"To constitute a good promissory note, no precise words of contract are necessary,
provided they amount, in legal effect, to a promise to pay. In other words, if over
and above the mere acknowledgment of the debt there may be collected from the words
used a promise to pay it, the instrument may be regarded as a promissory note. 1
Daniel, Neg. Inst. sec. 36 et seq.; Byles, Bills, 10, 11, and cases cited . . .
"Due A. B. $325, payable on demand," or, "I acknowledge myself to be indebted to A
in $109, to be paid on demand, for value received," or, "I O. U. $85 to be paid on
May 5th," are held to be promissory notes, significance being given to words of
payment as indicating a promise to pay." 1 Daniel Neg. Inst. see. 39, and cases
cited. (Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700, 703.)

Another argument of appellant is that as the deceased Luther Young did not sign
these notes, his estate is not liable for the same. This defense, however, was not
interposed in the lower court. There the only issue related to the amount to be
amount, considering that the money had been received in Japanese money. It is now
unfair to put up this new defense, because had it been raised in the court below,
appellees could have proved, what they now alleged that Pacita contracted the
obligation to support and maintain herself, her son and her husband (then
concentrated at Santo Tomas University) during the hard days of the occupation.

It is now settled practice that on appeal a change of theory is not permitted.

In order that a question may be raised on appeal, it is essential that it be within


the issues made by the parties in their pleadings. Consequently, when a party
deliberately adopts a certain theory, and the case is tried and decided upon that
theory in the court below, he will not be permitted to change his theory on appeal
because, to permit him to do so, would be unfair to the adverse party. (Rules of
Court by Moran-1957 Ed. Vol. I p. 715 citing Agoncillo vs. Javier, 38 Phil., 424;
American Express Company vs. Natividad, 46 Phil., 207; San Agustin vs. Barrios, 68
Phil., 475, 480; Toribio vs. Dacasa, 55 Phil., 461.)

Appellant's last assignment of error concerns attorneys fees. He says there was no
reason for making this and exception to the general rule that attorney's fees are
not recoverable in the absence of stipulation.

Under the new Civil Code, attorney's fees and expenses of litigation new be awarded
in this case if defendant acted in gross and evident bad faith in refusing to
satisfy plaintiff's plainly valid, just and demandable claim" or "where the court
deems it just and equitable that attorney's fees be recovered" (Article 2208 Civil
Code). These are — if applicable — some of the exceptions to the general rule that
in the absence of stipulation no attorney's fees shall be awarded.

The trial court did not explain why it ordered payment of counsel fees. Needless to
say, it is desirable that the decision should state the reason why such award is
made bearing in mind that it must necessarily rest on an exceptional situation.
Unless of course the text of the decision plainly shows the case to fall into one
of the exceptions, for instance "in actions for legal support," when exemplary
damages are awarded," etc. In the case at bar, defendant could not obviously be
held to have acted in gross and evident bad faith." He did not deny the debt, and
merely pleaded for adjustment, invoking decisions he thought to be controlling. If
the trial judge considered it "just and equitable" to require payment of attorney's
fees because the defense — adjustment under Ballantyne schedule — proved to be
untenable in view of this Court's applicable rulings, it would be error to uphold
his view. Otherwise, every time a defendant loses, attorney's fees would follow as
a matter of course. Under the article above cited, even a clearly untenable defense
would be no ground for awarding attorney's fees unless it amounted to "gross and
evident bad faith."

Plaintiff's attorneys attempt to sustain the award on the ground of defendant's


refusal to accept her offer, before the suit, to take P5,000 in full settlement of
her claim. We do not think this is tenable, defendant's attitude being merely a
consequence of his line of defense, which though erroneous does not amount to
"gross and evident bad faith." For one thing, there is a point raised by defendant,
which so far as we are informed, has not been directly passed upon in this
jurisdiction: the notes contained no express promise to pay a definite amount.
There being no circumstance making it reasonable and just to require defendant to
pay attorney's fees, the last assignment of error must be upheld.

Wherefore, in view of the foregoing considerations, the appealed decision is


affirmed, except as to the attorney's fees which are hereby disapproved. So
ordered.

Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.


Endencia and Felix, JJ., concur.

Footnotes

1 Asis vs. Agdamag, 90 Phil., 249; Soriano vs. Abalos, 84 Phil., 206; 47 Off. Gaz.,
168; Ang Lam vs. Perigrina, 92 Phil 506.

2 Roño vs. Gomez, 83 Phil., 890, 49 Off. Gaz., p. 339; Gomez vs. Tabia, 84 Phil.,
269; 47 Off. Gaz., p. 6414; Garcia vs. De los Santos. 93 Phil., 683, 49 Off. Gaz.,
[ll], 4830; Arevalo vs. Barretto, 89 Phil., 633.

3 92 Phil., 506.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-10221 February 28, 1958

Intestate of Luther Young and Pacita Young, spouses. PACIFICA JIMENEZ, petitioner-
appellee,
vs.
DR. JOSE BUCOY, administrator-appellant.

Frank W. Brady and Pablo C. de Guia, Jr. for appellee.


E. A. Beltran for appellant.

BENGZON, J.:

In this intestate of Luther Young and Pacita Young who died in 1954 and 1952
respectively, Pacifica Jimenez presented for payment four promissory notes signed
by Pacita for different amounts totalling twenty-one thousand pesos (P21,000).

Acknowledging receipt by Pacita during the Japanese occupation, in the currency


then prevailing, the administrator manifested willingness to pay provided
adjustment of the sums be made in line with the Ballantyne schedule.

The claimant objected to the adjustment insisting on full payment in accordance


with the notes.
Applying doctrines of this Court on the matter, the Hon. Primitive L. Gonzales,
Judge, held that the notes should be paid in the currency prevailing after the war,
and that consequently plaintiff was entitled to recover P21,000 plus attorneys fees
for the sum of P2,000.

Hence this appeal.

Executed in the month of August 1944, the first promissory note read as follows:

Received from Miss Pacifica Jimenez the total amount of P10,000) ten thousand pesos
payable six months after the war, without interest.

The other three notes were couched in the same terms, except as to amounts and
dates.

There can be no serious question that the notes were promises to pay "six months
after the war," the amounts mentioned.

But the important question, which obviously compelled the administrator to appeal,
is whether the amounts should be paid, peso for peso, or whether a reduction should
be made in accordance with the well-known Ballantyne schedule.

This matter of payment of loans contracted during the Japanese occupation has
received our attention in many litigations after the liberation. The gist of our
adjudications, in so far as material here, is that if the loan should be paid
during the Japanese occupation, the Ballantyne schedule should apply with
corresponding reduction of the amount.1 However, if the loan was expressly agreed
to be payable only after the war or after liberation, or became payable after those
dates, no reduction could be effected, and peso-for-peso payment shall be ordered
in Philippine currency.2

The Ballantyne Conversion Table does not apply where the monetary obligation, under
the contract, was not payable during the Japanese occupation but until after one
year counted for the date of ratification of the Treaty of Peace concluding the
Greater East Asia War. (Arellano vs. De Domingo, 101 Phil., 902.)

When a monetary obligation is contracted during the Japanese occupation, to be


discharged after the war, the payment should be made in Philippine Currency. (Kare
et al. vs. Imperial et al., 102 Phil., 173.)

Now then, as in the case before us, the debtor undertook to pay "six months after
the war," peso for peso payment is indicated.

The Ang Lam3 case cited by appellant is not controlling, because the loan therein
given could have been repaid during the Japanese occupation. Dated December 26,
1944, it was payable within one year. Payment could therefore have been made during
January 1945. The notes here in question were payable only after the war.

The appellant administrator calls attention to the fact that the notes contained no
express promise to pay a specified amount. We declare the point to be without
merit. In accordance with doctrines on the matter, the note herein-above quoted
amounted in effect to "a promise to pay ten thousand pesos six months after the
war, without interest." And so of the other notes.

"An acknowledgment may become a promise by the addition of words by which a promise
of payment is naturally implied, such as, "payable," "payable" on a given day,
"payable on demand," "paid . . . when called for," . . . (10 Corpus Juris Secundum
p. 523.)
"To constitute a good promissory note, no precise words of contract are necessary,
provided they amount, in legal effect, to a promise to pay. In other words, if over
and above the mere acknowledgment of the debt there may be collected from the words
used a promise to pay it, the instrument may be regarded as a promissory note. 1
Daniel, Neg. Inst. sec. 36 et seq.; Byles, Bills, 10, 11, and cases cited . . .
"Due A. B. $325, payable on demand," or, "I acknowledge myself to be indebted to A
in $109, to be paid on demand, for value received," or, "I O. U. $85 to be paid on
May 5th," are held to be promissory notes, significance being given to words of
payment as indicating a promise to pay." 1 Daniel Neg. Inst. see. 39, and cases
cited. (Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700, 703.)

Another argument of appellant is that as the deceased Luther Young did not sign
these notes, his estate is not liable for the same. This defense, however, was not
interposed in the lower court. There the only issue related to the amount to be
amount, considering that the money had been received in Japanese money. It is now
unfair to put up this new defense, because had it been raised in the court below,
appellees could have proved, what they now alleged that Pacita contracted the
obligation to support and maintain herself, her son and her husband (then
concentrated at Santo Tomas University) during the hard days of the occupation.

It is now settled practice that on appeal a change of theory is not permitted.

In order that a question may be raised on appeal, it is essential that it be within


the issues made by the parties in their pleadings. Consequently, when a party
deliberately adopts a certain theory, and the case is tried and decided upon that
theory in the court below, he will not be permitted to change his theory on appeal
because, to permit him to do so, would be unfair to the adverse party. (Rules of
Court by Moran-1957 Ed. Vol. I p. 715 citing Agoncillo vs. Javier, 38 Phil., 424;
American Express Company vs. Natividad, 46 Phil., 207; San Agustin vs. Barrios, 68
Phil., 475, 480; Toribio vs. Dacasa, 55 Phil., 461.)

Appellant's last assignment of error concerns attorneys fees. He says there was no
reason for making this and exception to the general rule that attorney's fees are
not recoverable in the absence of stipulation.

Under the new Civil Code, attorney's fees and expenses of litigation new be awarded
in this case if defendant acted in gross and evident bad faith in refusing to
satisfy plaintiff's plainly valid, just and demandable claim" or "where the court
deems it just and equitable that attorney's fees be recovered" (Article 2208 Civil
Code). These are — if applicable — some of the exceptions to the general rule that
in the absence of stipulation no attorney's fees shall be awarded.

The trial court did not explain why it ordered payment of counsel fees. Needless to
say, it is desirable that the decision should state the reason why such award is
made bearing in mind that it must necessarily rest on an exceptional situation.
Unless of course the text of the decision plainly shows the case to fall into one
of the exceptions, for instance "in actions for legal support," when exemplary
damages are awarded," etc. In the case at bar, defendant could not obviously be
held to have acted in gross and evident bad faith." He did not deny the debt, and
merely pleaded for adjustment, invoking decisions he thought to be controlling. If
the trial judge considered it "just and equitable" to require payment of attorney's
fees because the defense — adjustment under Ballantyne schedule — proved to be
untenable in view of this Court's applicable rulings, it would be error to uphold
his view. Otherwise, every time a defendant loses, attorney's fees would follow as
a matter of course. Under the article above cited, even a clearly untenable defense
would be no ground for awarding attorney's fees unless it amounted to "gross and
evident bad faith."

Plaintiff's attorneys attempt to sustain the award on the ground of defendant's


refusal to accept her offer, before the suit, to take P5,000 in full settlement of
her claim. We do not think this is tenable, defendant's attitude being merely a
consequence of his line of defense, which though erroneous does not amount to
"gross and evident bad faith." For one thing, there is a point raised by defendant,
which so far as we are informed, has not been directly passed upon in this
jurisdiction: the notes contained no express promise to pay a definite amount.

There being no circumstance making it reasonable and just to require defendant to


pay attorney's fees, the last assignment of error must be upheld.

Wherefore, in view of the foregoing considerations, the appealed decision is


affirmed, except as to the attorney's fees which are hereby disapproved. So
ordered.

Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.


Endencia and Felix, JJ., concur.

Footnotes

1 Asis vs. Agdamag, 90 Phil., 249; Soriano vs. Abalos, 84 Phil., 206; 47 Off. Gaz.,
168; Ang Lam vs. Perigrina, 92 Phil 506.

2 Roño vs. Gomez, 83 Phil., 890, 49 Off. Gaz., p. 339; Gomez vs. Tabia, 84 Phil.,
269; 47 Off. Gaz., p. 6414; Garcia vs. De los Santos. 93 Phil., 683, 49 Off. Gaz.,
[ll], 4830; Arevalo vs. Barretto, 89 Phil., 633.

3 92 Phil., 506.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-27782 July 31, 1970

OCTAVIO A. KALALO, plaintiff-appellee,


vs.
ALFREDO J. LUZ, defendant-appellant.

Amelia K. del Rosario for plaintiff-appellee.

Pelaez, Jalandoni & Jamir for defendant-appellant.

ZALDIVAR, J.:

Appeal from the decision, dated, February 10, 1967, of the Court of First Instance
of Rizal (Branch V, Quezon City) in its Civil Case No. Q-6561.
On November 17, 1959, plaintiff-appellee Octavio A. Kalalo hereinafter referred to
as appellee), a licensed civil engineer doing business under the firm name of O. A.
Kalalo and Associates, entered into an agreement (Exhibit A )1 with defendant-
appellant Alfredo J . Luz (hereinafter referred to as appellant), a licensed
architect, doing business under firm name of A. J. Luz and Associates, whereby the
former was to render engineering design services to the latter for fees, as
stipulated in the agreement. The services included design computation and sketches,
contract drawing and technical specifications of all engineering phases of the
project designed by O. A. Kalalo and Associates bill of quantities and cost
estimate, and consultation and advice during construction relative to the work. The
fees agreed upon were percentages of the architect's fee, to wit: structural
engineering, 12-½%; electrical engineering, 2-½%. The agreement was subsequently
supplemented by a "clarification to letter-proposal" which provided, among other
things, that "the schedule of engineering fees in this agreement does not cover the
following: ... D. Foundation soil exploration, testing and evaluation; E. Projects
that are principally engineering works such as industrial plants, ..." and "O. A.
Kalalo and Associates reserve the right to increase fees on projects ,which cost
less than P100,000 ...."2 Pursuant to said agreement, appellee rendered engineering
services to appellant in the following projects:

(a) Fil-American Life Insurance Building at Legaspi City;

(b) Fil-American Life Insurance Building at Iloilo City;

(c) General Milling Corporation Flour Mill at Opon Cebu;

(d) Menzi Building at Ayala Blvd., Makati, Rizal;

(e) International Rice Research Institute, Research center Los Baños, Laguna;

(f) Aurelia's Building at Mabini, Ermita, Manila;

(g) Far East Bank's Office at Fil-American Life Insurance Building at Isaac Peral
Ermita, Manila;

(h) Arthur Young's residence at Forbes Park, Makati, Rizal;

(i) L & S Building at Dewey Blvd., Manila; and

(j) Stanvac Refinery Service Building at Limay, Bataan.

On December 1 1, '1961, appellee sent to appellant a statement of account (Exhibit


"1"),3 to which was attached an itemized statement of defendant-appellant's account
(Exh. "1-A"), according to which the total engineering fee asked by appellee for
services rendered amounted to P116,565.00 from which sum was to be deducted the
previous payments made in the amount of P57,000.00, thus leaving a balance due in
the amount of P59,565.00.

On May 18, 1962 appellant sent appellee a resume of fees due to the latter. Said
fees, according to appellant. amounted to P10,861.08 instead of the amount claimed
by the appellee. On June 14, 1962 appellant sent appellee a check for said amount,
which appellee refused to accept as full payment of the balance of the fees due
him.

On August 10, 1962, appellee filed a complaint against appellant, containing four
causes of action. In the first cause of action, appellee alleged that for services
rendered in connection with the different projects therein mentioned there was due
him fees in sum s consisting of $28,000 (U.S.) and P100,204.46, excluding
interests, of which sums only P69,323.21 had been paid, thus leaving unpaid the
$28,000.00 and the balance of P30,881.25. In the second cause of action, appellee
claimed P17,000.00 as consequential and moral damages; in the third cause of action
claimed P55,000.00 as moral damages, attorney's fees and expenses of litigation;
and in the fourth cause of action he claimed P25,000.00 as actual damages, and also
for attorney's fees and expenses of litigation.

In his answer, appellant admitted that appellee rendered engineering services, as


alleged in the first cause of action, but averred that some of appellee's services
were not in accordance with the agreement and appellee's claims were not justified
by the services actually rendered, and that the aggregate amount actually due to
appellee was only P80,336.29, of which P69,475.21 had already been paid, thus
leaving a balance of only P10,861.08. Appellant denied liability for any damage
claimed by appellee to have suffered, as alleged in the second, third and fourth
causes of action. Appellant also set up affirmative and special defenses, alleging
that appellee had no cause of action, that appellee was in estoppel because of
certain acts, representations, admissions and/or silence, which led appellant to
believe certain facts to exist and to act upon said facts, that appellee's claim
regarding the Menzi project was premature because appellant had not yet been paid
for said project, and that appellee's services were not complete or were performed
in violation of the agreement and/or otherwise unsatisfactory. Appellant also set
up a counterclaim for actual and moral damages for such amount as the court may
deem fair to assess, and for attorney's fees of P10,000.00.

Inasmuch as the pleadings showed that the appellee's right to certain fees for
services rendered was not denied, the only question being the assessment of the
proper fees and the balance due to appellee after deducting the admitted payments
made by appellant, the trial court, upon agreement of the parties, authorized the
case to be heard before a Commissioner. The Commissioner rendered a report which,
in resume, states that the amount due to appellee was $28,000.00 (U.S.) as his fee
in the International Research Institute Project which was twenty percent (20%) of
the $140,000.00 that was paid to appellant, and P51,539.91 for the other projects,
less the sum of P69,475.46 which was already paid by the appellant. The
Commissioner also recommended the payment to appellee of the sum of P5,000.00 as
attorney's fees.

At the hearing on the Report of the Commissioner, the respective counsel of the
parties manifested to the court that they had no objection to the findings of fact
of the Commissioner contained in the Report, and they agreed that the said Report
posed only two legal issues, namely: (1) whether under the facts stated in the
Report, the doctrine of estoppel would apply; and (2) whether the recommendation in
the Report that the payment of the amount. due to the plaintiff in dollars was
legally permissible, and if not, at what rate of exchange it should be paid in
pesos. After the parties had submitted their respective memorandum on said issues,
the trial court rendered its decision dated February 10, 1967, the dispositive
portion of which reads as follows:

WHEREFORE, judgment is rendered in favor of plaintiff and against the defendant, by


ordering the defendant to pay plaintiff the sum of P51,539.91 and $28,000.00, the
latter to be converted into the Philippine currency on the basis of the current
rate of exchange at the time of the payment of this judgment, as certified to by
the Central Bank of the Philippines, from which shall be deducted the sum of
P69,475.46, which the defendant had paid the plaintiff, and the legal rate of
interest thereon from the filing of the complaint in the case until fully paid for;
by ordering the defendant to pay to plaintiff the further sum of P8,000.00 by way
of attorney's fees which the Court finds to be reasonable in the premises, with
costs against the defendant. The counterclaim of the defendant is ordered
dismissed.

From the decision, this appeal was brought, directly to this Court, raising only
questions of law.

During the pendency of this appeal, appellee filed a petition for the issuance of a
writ of attachment under Section 1 (f) of Rule 57 of the Rules of Court upon the
ground that appellant is presently residing in Canada as a permanent resident
thereof. On June 3, 1969, this Court resolved, upon appellee's posting a bond of
P10,000.00, to issue the writ of attachment, and ordered the Provincial Sheriff of
Rizal to attach the estate, real and personal, of appellant Alfredo J. Luz within
the province, to the value of not less than P140,000.00.

The appellant made the following assignments of errors:

I. The lower court erred in not declaring and holding that plaintiff-appellee's
letter dated December 11, 1961 (Exhibit "1") and the statement of account (Exhibit
"1-A") therein enclosed, had the effect, cumulatively or alternatively, of placing
plaintiff-appellee in estoppel from thereafter modifying the representations made
in said exhibits, or of making plaintiff-appellee otherwise bound by said
representations, or of being of decisive weight in determining the true intent of
the parties as to the nature and extent of the engineering services rendered and/or
the amount of fees due.

II. The lower court erred in declaring and holding that the balance owing from
defendant-appellant to plaintiff-appellee on the IRRI Project should be paid on the
basis of the rate of exchange of the U.S. dollar to the Philippine peso at the time
of payment of judgment. .

III. The lower court erred in not declaring and holding that the aggregate amount
of the balance due from defendant-appellant to plaintiff-appellee is only
P15,792.05.

IV. The lower court erred in awarding attorney's fees in the sum of P8,000.00,
despite the commissioner's finding, which plaintiff-appellee has accepted and has
not questioned, that said fee be only P5,000.00; and

V. The lower court erred in not granting defendant-appellant relief on his counter-
claim.

1. In support of his first assignment of error appellant argues that in Exhibit 1-


A, which is a statement of accounts dated December 11, 1961, sent by appellee to
appellant, appellee specified the various projects for which he claimed engineering
fees, the precise amount due on each particular engineering service rendered on
each of the various projects, and the total of his claims; that such a statement
barred appellee from asserting any claim contrary to what was stated therein, or
from taking any position different from what he asserted therein with respect to
the nature of the engineering services rendered; and consequently the trial court
could not award fees in excess of what was stated in said statement of accounts.
Appellant argues that for estoppel to apply it is not necessary, contrary to the
ruling of the trial court, that the appellant should have actually relied on the
representation, but that it is sufficient that the representations were intended to
make the defendant act there on; that assuming arguendo that Exhibit 1-A did not
put appellee in estoppel, the said Exhibit 1-A nevertheless constituted a formal
admission that would be binding on appellee under the law on evidence, and would
not only belie any inconsistent claim but also would discredit any evidence adduced
by appellee in support of any claim inconsistent with what appears therein; that,
moreover, Exhibit 1-A, being a statement of account, establishes prima facie the
accuracy and correctness of the items stated therein and its correctness can no
longer be impeached except for fraud or mistake; that Exhibit 1-A furthermore,
constitutes appellee's own interpretation of the contract between him and
appellant, and hence, is conclusive against him.
On the other hand, appellee admits that Exhibit 1-A itemized the services rendered
by him in the various construction projects of appellant and that the total
engineering fees charged therein was P116,565.00, but maintains that he was not in
estoppel: first, because when he prepared Exhibit 1-A he was laboring under an
innocent mistake, as found by the trial court; second, because appellant was not
ignorant of the services actually rendered by appellee and the fees due to the
latter under the original agreement, Exhibit "A."

We find merit in the stand of appellee.

The statement of accounts (Exh. 1-A) could not estop appellee, because appellant
did not rely thereon as found by the Commissioner, from whose Report we read:

While it is true that plaintiff vacillated in his claim, yet, defendant did not in
anyway rely or believe in the different claims asserted by the plaintiff and
instead insisted on a claim that plaintiff was only entitled to P10,861.08 as per a
separate resume of fees he sent to the plaintiff on May 18, 1962 (See Exhibit 6).4

The foregoing finding of the Commissioner, not disputed by appellant, was adopted
by the trial court in its decision. Under article 1431 of the Civil Code, in order
that estoppel may apply the person, to whom representations have been made and who
claims the estoppel in his favor must have relied or acted on such representations.
Said article provides:

Art. 1431. Through estoppel an admission or representation is rendered conclusive


upon the person making it, and cannot be denied or disproved as against the person
relying thereon.

An essential element of estoppel is that the person invoking it has been influenced
and has relied on the representations or conduct of the person sought to be
estopped, and this element is wanting in the instant case. In Cristobal vs. Gomez,5
this Court held that no estoppel based on a document can be invoked by one who has
not been mislead by the false statements contained therein. And in Republic of the
Philippines vs. Garcia, et al.,6 this Court ruled that there is no estoppel when
the statement or action invoked as its basis did not mislead the adverse party-
Estoppel has been characterized as harsh or odious and not favored in law.7 When
misapplied, estoppel becomes a most effective weapon to accomplish an injustice,
inasmuch as it shuts a man's mouth from speaking the truth and debars the truth in
a particular case.8 Estoppel cannot be sustained by mere argument or doubtful
inference: it must be clearly proved in all its essential elements by clear,
convincing and satisfactory evidence.9 No party should be precluded from making out
his case according to its truth unless by force of some positive principle of law,
and, consequently, estoppel in pains must be applied strictly and should not be
enforced unless substantiated in every particular. 1 0

The essential elements of estoppel in pais may be considered in relation to the


party sought to be estopped, and in relation to the party invoking the estoppel in
his favor. As related to the party to be estopped, the essential elements are: (1)
conduct amounting to false representation or concealment of material facts or at
least calculated to convey the impression that the facts are otherwise than, and
inconsistent with, those which the party subsequently attempts to assert; (2)
intent, or at least expectation that his conduct shall be acted upon by, or at
least influence, the other party; and (3) knowledge, actual or constructive, of the
real facts. As related to the party claiming the estoppel, the essential elements
are (1) lack of knowledge and of the means of knowledge of the truth as the facts
in questions; (2) (reliance, in good faith, upon the conduct or statements of the
party to be estopped; (3) action or inaction based thereon of such character as To
change the position or status of the party claiming the estoppel, to his injury,
detriment or prejudice. 1 1

The first essential element in relation to the party sought to be estopped does not
obtain in the instant case, for, as appears in the Report of the Commissioner,
appellee testified "that when he wrote Exhibit 1 and prepared Exhibit 1-A, he had
not yet consulted the services of his counsel and it was only upon advice of
counsel that the terms of the contract were interpreted to him resulting in his
subsequent letters to the defendant demanding payments of his fees pursuant to the
contract Exhibit A." 1 2 This finding of the Commissioner was adopted by the trial
court. 1 3 It is established , therefore, that Exhibit 1-A was written by appellee
through ignorance or mistake. Anent this matter, it has been held that if an act,
conduct or misrepresentation of the party sought to be estopped is due to ignorance
founded on innocent mistake, estoppel will not arise. 1 4 Regarding the essential
elements of estoppel in relation to the party claiming the estoppel, the first
element does not obtain in the instant case, for it cannot be said that appellant
did not know, or at least did not have the means of knowing, the services rendered
to him by appellee and the fees due thereon as provided in Exhibit A. The second
element is also wanting, for, as adverted to, appellant did not rely on Exhibit 1-A
but consistently denied the accounts stated therein. Neither does the third element
obtain, for appellant did not act on the basis of the representations in Exhibit 1-
A, and there was no change in his position, to his own injury or prejudice.

Appellant, however, insists that if Exhibit 1-A did not put appellee in estoppel,
it at least constituted an admission binding upon the latter. In this connection,
it cannot be gainsaid that Exhibit 1-A is not a judicial admission. Statements
which are not estoppels nor judicial admissions have no quality of conclusiveness,
and an opponent. whose admissions have been offered against him may offer any
evidence which serves as an explanation for his former assertion of what he now
denies as a fact. This may involve the showing of a mistake. Accordingly, in Oas
vs. Roa, 1 6 it was held that when a party to a suit has made an admission of any
fact pertinent to the issue involved, the admission can be received against him;
but such an admission is not conclusive against him, and he is entitled to present
evidence to overcome the effect of the admission. Appellee did explain, and the
trial court concluded, that Exhibit 1-A was based on either his ignorance or
innocent mistake and he, therefore, is not bound by it.

Appellant further contends that Exhibit 1-A being a statement of account,


establishes prima facie the accuracy and correctness of the items stated therein.
If prima facie, as contended by appellant, then it is not absolutely conclusive
upon the parties. An account stated may be impeached for fraud, mistake or error.
In American Decisions, Vol. 62, p. 95, cited as authority by appellant himself. we
read thus:

An account stated or settled is a mere admission that the account is correct. It is


not an estoppel. The account is still open to impeachment for mistakes or errors.
Its effect is to establish, prima facie, the accuracy of the items without other
proof; and the party seeking to impeach it is bound to show affirmatively the
mistake or error alleged. The force of the admission and the strength of the
evidence necessary to overcome it will depend upon the circumstances of the case.

In the instant case, it is Our view that the ignorance mistake that attended the
writing of Exhibit 1-A by appellee was sufficient to overcome the prima facie
evidence of correctness and accuracy of said Exhibit 1-A.

Appellant also urges that Exhibit 1-A constitutes appellee's own interpretation of
the contract, and is, therefore, conclusive against him. Although the practical
construction of the contract by one party, evidenced by his words or acts, can be
used against him in behalf of the other party, 1 7 yet, if one of the parties
carelessly makes a wrong interpretation of the words of his contract, or performs
more than the contract requires (as reasonably interpreted independently of his
performance), as happened in the instant case, he should be entitled to a
restitutionary remedy, instead of being bound to continue to his erroneous
interpretation or his erroneous performance and "the other party should not be
permitted to profit by such mistake unless he can establish an estoppel by proving
a material change of position made in good faith. The rule as to practical
construction does not nullify the equitable rules with respect to performance by
mistake." 1 8 In the instant case, it has been shown that Exhibit 1-A was written
through mistake by appellee and that the latter is not estopped by it. Hence, even
if said Exhibit 1-A be considered as practical construction of the contract by
appellee, he cannot be bound by such erroneous interpretation. It has been held
that if by mistake the parties followed a practice in violation of the terms of the
agreement, the court should not perpetuate the error. 1 9

2. In support of the second assignment of error, that the lower court erred in
holding that the balance from appellant on the IRRI project should be paid on the
basis of the rate of exchange of the U.S. dollar to the Philippine peso at the time
of payment of the judgment, appellant contends: first, that the official rate at
the time appellant received his architect's fees for the IRRI project, and
correspondingly his obligation to appellee's fee on August 25, 1961, was P2.00 to
$1.00, and cites in support thereof Section 1612 of the Revised Administrative
Code, Section 48 of Republic Act 265 and Section 6 of Commonwealth Act No. 699;
second, that the lower court's conclusion that the rate of exchange to be applied
in the conversion of the $28,000.00 is the current rate of exchange at the time the
judgment shall be satisfied was based solely on a mere presumption of the trial
court that the defendant did not convert, there being no showing to that effect,
the dollars into Philippine currency at the official rate, when the legal
presumption should be that the dollars were converted at the official rate of $1.00
to P2.00 because on August 25, 1961, when the IRRI project became due and payable,
foreign exchange controls were in full force and effect, and partial decontrol was
effected only afterwards, during the Macapagal administration; third, that the
other ground advanced by the lower court for its ruling, to wit, that appellant
committed a breach of his obligation to turn over to the appellee the engineering
fees received in U.S. dollars for the IRRI project, cannot be upheld, because there
was no such breach, as proven by the fact that appellee never claimed in Exhibit 1-
A that he should be paid in dollars; and there was no provision in the basic
contract (Exh. "A") that he should be paid in dollars; and, finally, even if there
were such provision, it would have no binding effect under the provision of
Republic Act 529; that, moreover, it cannot really be said that no payment was made
on that account for appellant had already paid P57,000.00 to appellee, and under
Article 125 of the Civil Code, said payment could be said to have been applied to
the fees due from the IRRI project, this project being the biggest and this debt
being the most onerous.

In refutation of appellant's argument in support of the second assignment of error,


appellee argues that notwithstanding Republic Act 529, appellant can be compelled
to pay the appellee in dollars in view of the fact that appellant received his fees
in dollars, and appellee's fee is 20% of appellant's fees; and that if said amount
is be converted into Philippine Currency, the rate of exchange should be that at
the time of the execution of the judgment. 2 0

We have taken note of the fact that on August 25, 1961, the date when appellant
said his obligation to pay appellee's fees became due, there was two rates of
exchange, to wit: the preferred rate of P2.00 to $1.00, and the free market rate.
It was so provided in Circular No. 121 of the Central Bank of the Philippines,
dated March 2, 1961. amending an earlier Circular No. 117, and in force until
January 21, 1962 when it was amended by Circular No. 133, thus:

1. All foreign exchange receipts shall be surrendered to the Central Bank of those
authorized to deal in foreign exchange as follows:

Percentage of Total to be surrendered at

Preferred: Free Market Rate: Rate:

(a) Export Proceeds, U.S. Government Expenditures invisibles other than those
specifically mentioned below. ................................................ 25
75

(b) Foreign Investments, Gold Proceeds, Tourists and Inward Remittances of Veterans
and Filipino Citizens; and Personal Expenses of Diplomatic Per
personnel ................................. 100"2 1

The amount of $140,000.00 received by appellant foil the International Rice


Research Institute project is not within the scope of sub-paragraph (a) of
paragraph No. 1 of Circular No. 121. Appellant has not shown that 25% of said
amount had to be surrendered to the Central Bank at the preferred rate because it
was either export proceeds, or U.S. Government expenditures, or invisibles not
included in sub-paragraph (b). Hence, it cannot be said that the trial court erred
in presuming that appellant converted said amount at the free market rate. It is
hard to believe that a person possessing dollars would exchange his dollars at the
preferred rate of P2.00 to $1.00, when he is not obligated to do so, rather than at
the free market rate which is much higher. A person is presumed to take ordinary
care of his concerns, and that the ordinary course of business has been
followed. 2 2

Under the agreement, Exhibit A, appellee was entitled to 20% of $140,000.00, or the
amount of $28,000.00. Appellee, however, cannot oblige the appellant to pay him in
dollars, even if appellant himself had received his fee for the IRRI project in
dollars. This payment in dollars is prohibited by Republic Act 529 which was
enacted on June 16, 1950. Said act provides as follows:

SECTION 1. Every provision contained in, or made with respect to, any obligation
which provision purports to give the obligee the right to require payment in gold
or in a particular kind of coin or currency other than Philippine currency or in an
amount of money of the Philippines measured thereby, be as it is hereby declared
against public policy, and null, void and of no effect, and no such provision shall
be contained in, or made with respect to, any obligation hereafter incurred. Every
obligation heretofore or here after incurred, whether or not any such provision as
to payment is contained therein or made with respect thereto, shall be discharged
upon payment in any coin or currency which at the time of payment is legal tender
for public and private debts: Provided, That, ( a) if the obligation was incurred
prior to the enactment of this Act and required payment in a particular kind of
coin or currency other than Philippine currency, it shall be discharged in
Philippine currency measured at the prevailing rate of exchange at the time the
obligation was incurred, (b) except in case of a loan made in a foreign currency
stipulated to be payable in the same currency in which case the rate of exchange
prevailing at the time of the stipulated date of payment shall prevail. All coin
and currency, including Central Bank notes, heretofore or hereafter issued and
declared by the Government of the Philippines shall be legal tender for all debts,
public and private.

Under the above-quoted provision of Republic Act 529, if the obligation was
incurred prior to the enactment of the Act and require payment in a particular kind
of coin or currency other than the Philippine currency the same shall be discharged
in Philippine currency measured at the prevailing rate of exchange at the time the
obligation was incurred. As We have adverted to, Republic Act 529 was enacted on
June 16, 1950. In the case now before Us the obligation of appellant to pay
appellee the 20% of $140,000.00, or the sum of $28,000.00, accrued on August 25,
1961, or after the enactment of Republic Act 529. It follows that the provision of
Republic Act 529 which requires payment at the prevailing rate of exchange when the
obligation was incurred cannot be applied. Republic Act 529 does not provide for
the rate of exchange for the payment of obligation incurred after the enactment of
said Act. The logical Conclusion, therefore, is that the rate of exchange should be
that prevailing at the time of payment. This view finds support in the ruling of
this Court in the case of Engel vs. Velasco & Co. 2 3 where this Court held that
even if the obligation assumed by the defendant was to pay the plaintiff a sum of
money expressed in American currency, the indemnity to be allowed should be
expressed in Philippine currency at the rate of exchange at the time of judgment
rather than at the rate of exchange prevailing on the date of defendant's breach.
This is also the ruling of American court as follows:

The value in domestic money of a payment made in foreign money is fixed with
respect to the rate of exchange at the time of payment. (70 CJS p. 228)

According to the weight of authority the amount of recovery depends upon the
current rate of exchange, and not the par value of the particular money involved.
(48 C.J. 605-606)

The value in domestic money of a payment made in foreign money is fixed in


reference to the rate of exchange at the time of such payment. (48 C.J. 605)

It is Our considered view, therefore, that appellant should pay the appellee the
equivalent in pesos of the $28,000.00 at the free market rate of exchange at the
time of payment. And so the trial court did not err when it held that herein
appellant should pay appellee $28,000.00 "to be converted into the Philippine
currency on the basis of the current rate of exchange at the time of payment of
this judgment, as certified to by the Central Bank of the Philippines, ...." 2 4

Appellant also contends that the P57,000.00 that he had paid to appellee should
have been applied to the due to the latter on the IRRI project because such debt
was the most onerous to appellant. This contention is untenable. The Commissioner
who was authorized by the trial court to receive evidence in this case, however,
reports that the appellee had not been paid for the account of the $28,000.00 which
represents the fees of appellee equivalent to 20% of the $140,000.00 that the
appellant received as fee for the IRRI project. This is a finding of fact by the
Commissioner which was adopted by the trial court. The parties in this case have
agreed that they do not question the finding of fact of the Commissioner. Thus, in
the decision appealed from the lower court says:

At the hearing on the Report of the Commissioner on February 15, 1966, the counsels
for both parties manifested to the court that they have no objection to the
findings of facts of the Commissioner in his report; and agreed that the said
report only poses two (2)legal issues, namely: (1) whether under the facts stated
in the Report, the doctrine of estoppel will apply; and (2) whether the
recommendation in the Report that the payment of amount due to the plaintiff in
dollars is permissible under the law, and, if not, at what rate of exchange should
it be paid in pesos (Philippine currency) .... 2 5

In the Commissioner's report, it is spetifically recommended that the appellant be


ordered to pay the plaintiff the sum of "$28,000. 00 or its equivalent as the fee
of the plaintiff under Exhibit A on the IRRI project." It is clear from this report
of the Commissioner that no payment for the account of this $28,000.00 had been
made. Indeed, it is not shown in the record that the peso equivalent of the
$28,000.00 had been fixed or agreed upon by the parties at the different times when
the appellant had made partial payments to the appellee.
3. In his third assignment of error, appellant contends that the lower court erred
in not declaring that the aggregate amount due from him to appellee is only
P15,792.05. Appellant questions the propriety or correctness of most of the items
of fees that were found by the Commissioner to be due to appellee for services
rendered. We believe that it is too late for the appellant to question the
propriety or correctness of those items in the present appeal. The record shows
that after the Commissioner had submitted his report the lower court, on February
15, 1966, issued the following order:

When this case was called for hearing today on the report of the Commissioner, the
counsels of the parties manifested that they have no objection to the findings of
facts in the report. However, the report poses only legal issues, namely: (1)
whether under the facts stated in the report, the doctrine of estoppel will apply;
and (2) whether the recommendation in the report that the alleged payment of the
defendant be made in dollars is permissible by law and, if not, in what rate it
should be paid in pesos (Philippine Currency). For the purpose of resolving these
issues the parties prayed that they be allowed to file their respective memoranda
which will aid the court in the determination of said issues. 2 6

In consonance with the afore-quoted order of the trial court, the appellant
submitted his memorandum which opens with the following statements:

As previously manifested, this Memorandum shall be confined to:

(a) the finding in the Commissioner's Report that defendant's defense of estoppel
will not lie (pp. 17-18, Report); and

(b) the recommendation in the Commissioner's Report that defendant be ordered to


pay plaintiff the sum of '$28,000.00 (U.S.) or its equivalent as the fee of the
plaintiff under Exhibit 'A' in the IRRI project.'

More specifically this Memorandum proposes to demonstrate the affirmative of three


legal issues posed, namely:

First: Whether or not plaintiff's letter dated December 11, 1961 (Exhibit 'I')
and/or Statement of Account (Exhibit '1-A') therein enclosed has the effect of
placing plaintiff in estoppel from thereafter modifying the representations made in
said letter and Statement of Account or of making plaintiff otherwise bound
thereby; or of being decisive or great weight in determining the true intent of the
parties as to the amount of the engineering fees owing from defendant to plaintiff;

Second: Whether or not defendant can be compelled to pay whatever balance is owing
to plaintiff on the IRRI (International Rice and Research Institute) project in
United States dollars; and

Third: Whether or not in case the ruling of this Honorable Court be that defendant
cannot be compelled to pay plaintiff in United States dollars, the dollar-to-peso
convertion rate for determining the peso equivalent of whatever balance is owing to
plaintiff in connection with the IRRI project should be the 2 to 1 official rate
and not any other rate. 2 7

It is clear, therefore, that what was submitted by appellant to the lower court for
resolution did not include the question of correctness or propriety of the amounts
due to appellee in connection with the different projects for which the appellee
had rendered engineering services. Only legal questions, as above enumerated, were
submitted to the trial court for resolution. So much so, that the lower court in
another portion of its decision said, as follows:

The objections to the Commissioner's Report embodied in defendant's memorandum of


objections, dated March 18, 1966, cannot likewise be entertained by the Court
because at the hearing of the Commissioner's Report the parties had expressly
manifested that they had no objection to the findings of facts embodied therein.

We, therefore hold that the third assignment of error of the appellant has no
merit.

4. In his fourth assignment of error, appellant questions the award by the lower
court of P8,000.00 for attorney's fees. Appellant argues that the Commissioner, in
his report, fixed the sum of P5,000.00 as "just and reasonable" attorney's fees, to
which amount appellee did not interpose any objection, and by not so objecting he
is bound by said finding; and that, moreover, the lower court gave no reason in its
decision for increasing the amount to P8,000.00.

Appellee contends that while the parties had not objected to the findings of the
Commissioner, the assessment of attorney's fees is always subject to the court's
appraisal, and in increasing the recommended fees from P5,000.00 to P8,000.00 the
trial court must have taken into consideration certain circumstances which warrant
the award of P8,000.00 for attorney's fees.

We believe that the trial court committed no error in this connection. Section 12
of Rule 33 of the Rules of Court, on which the fourth assignment of error is
presumably based, provides that when the parties stipulate that a commissioner's
findings of fact shall be final, only questions of law arising from the facts
mentioned in the report shall thereafter be considered. Consequently, an agreement
by the parties to abide by the findings of fact of the commissioner is equivalent
to an agreement of facts binding upon them which the court cannot disregard. The
question, therefore, is whether or not the estimate of the reasonable fees stated
in the report of the Commissioner is a finding of fact.

The report of the Commissioner on this matter reads as follows:

As regards attorney's fees, under the provisions of Art 2208, par (11), the same
may be awarded, and considering the number of hearings held in this case, the
nature of the case (taking into account the technical nature of the case and the
voluminous exhibits offered in evidence), as well as the way the case was handled
by counsel, it is believed, subject to the Court's appraisal of the matter, that
the sum of P5,000.00 is just and reasonable as attorney's fees." 2 8

It is thus seen that the estimate made by the Commissioner was an expression of
belief, or an opinion. An opinion is different from a fact. The generally
recognized distinction between a statement of "fact" and an expression of "opinion"
is that whatever is susceptible of exact knowledge is a matter of fact, while that
not susceptible of exact knowledge is generally regarded as an expression of
opinion. 2 9 It has also been said that the word "fact," as employed in the legal
sense includes "those conclusions reached by the trior from shifting testimony,
weighing evidence, and passing on the credit of the witnesses, and it does not
denote those inferences drawn by the trial court from the facts ascertained and
settled by it. 3 0 In the case at bar, the estimate made by the Commissioner of the
attorney's fees was an inference from the facts ascertained by him, and is,
therefore, not a finding of facts. The trial court was, consequently, not bound by
that estimate, in spite of the manifestation of the parties that they had no
objection to the findings of facts of the Commissioner in his report. Moreover,
under Section 11 of Rule 33 of the Rules of Court, the court may adopt, modify, or
reject the report of the commissioner, in whole or in part, and hence, it was
within the trial court's authority to increase the recommended attorney's fees of
P5,000.00 to P8,000.00. It is a settled rule that the amount of attorney's fees is
addressed to the sound discretion of the court. 3 1
It is true, as appellant contends, that the trial court did not state in the
decision the reasons for increasing the attorney's fees. The trial court, however,
had adopted the report of the Commissioner, and in adopting the report the trial
court is deemed to have adopted the reasons given by the Commissioner in awarding
attorney's fees, as stated in the above-quoted portion of the report. Based on the
reasons stated in the report, the trial court must have considered that the
reasonable attorney's fees should be P8,000.00. Considering that the judgment
against the appellant would amount to more than P100,000.00, We believe that the
award of P8,000.00 for attorney's fees is reasonable.

5. In his fifth assignment of error appellant urges that he is entitled to relief


on his counterclaim. In view of what We have stated in connection with the
preceding four assignments of error, We do not consider it necessary to dwell any
further on this assignment of error.

WHEREFORE, the decision appealed from is affirmed, with costs against the
defendant-appellant. It is so ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Castro, Fernando, Teehankee,


Barredo and Villamor, JJ., concur.

# Footnotes

1 Annex A to complaint, pp. 18-21, Record on Appeal.

2 Record on Appeal, pp. 21-26.

3 Record on Appeal, pp. 115-118.

4 Record on Appeal, p. 96.

5 50 Phil. 810, 821.

6 91 Phil. 46, 49.

7 Coronel, 7 et al. vs. CIR, et al., 24 -SCRA, 990, 996.

8 28 Am. Jur., 2d. , pp. 601-602.

9 Rivers vs. Metropolitan Life Ins. Co. of New York, 6 NY 2d. 3, 5.

10 28 Am. Jur. 2d. p. 642.

11 Art. 1437, Civil Code. 28 Am. Jur. 2d, pp. 640-641; Reyes and Puno, an Outline
of Philippine Civil Law, Vol. IV, p. 277.

12 Record on appeal, pp. 95-96.

13 Record on Appeal, p. 155.

14 Ramiro vs. Grato 54 Phil. 744, 750; Coleman vs. Southern Pacific Co., 14 Cal
App. 2d 121, 296 P2d 386.

15 Wigmore, Evidence, 3d ed., Vol. IV. pp. 21-23.

16 7 Phil. 20, 22.


17 Corbin On Contracts, Vol. 3, P. 145.

18 Corbin On Contracts, Vol. 3, p. 147, and cases cited therein.

19 In re Chicago & E. 1. Rv. Co., 94 F2d 296; Boucher vs. Godfrey, 178 A 655, 119
Conn 622.

20 Citing 48 CJ, 605, 606-607 in support of his submission.

21 Arthur P. Bacomo Central Bank Circulars and Memoranda, 1949- 1968, p. 389.

22 Rule 131, See. 5, pars. (d) and (g), Rules of Court.

23 47 Phil 115, 142.

24 This ruling modifies the decision in Arrieta vs. National Rice and Corn
Corporation, L-15645, January 31, 1964 (10 SCRA 79), where it was held that the
obligation based on dollar should be converted into the Philippine peso at the rate
of exchange prevailing at the time the obligation was incurred, or on July 1, 1952.
The provision of Rep. Act 529 was wrong applied in this case, because the
obligation arose after the enactment of Rep. Act 529 (June 16, 1950). The rate of
exchange prevailing at the time the obligation was incurred would apply only to
obligations that were incurred prior to the enactment of Rep. Act 529, but not to
obligations incurred after the enactment of said Act. 25 Record on Appeal, p. 149.

26 Record on Appeal, p. 99.

27 Record on Appeal, pp. 113-115.

28 Record on Appeal, p. 97; emphasis supplied.

29 Pitney Bomes Inc. vs. Sirkle et al., 248 S. W. 2d. 920.

30 Porter vs. Industrial Commission of Wisconsin, et al., 173 Wis. 267, 181 N.W.
317, 318.

31 San Miguel Brewery, Inc. vs. Magno, L-21879, Sept. 29, 1967, 21 SCRA 292.

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